America should not blame trade – or its trading partners – for its ills

Bernie Sanders and Donald Trump are leading a new American awakening on global trade. According to the new emerging consensus, America has been the victim of bad trade deals – including the yet-to-be-ratified Trans-Pacific Partnership (TPP) – for decades. These deals have shipped millions of high-paying American jobs abroad and in the process hollowed out the American middle class.

When Sanders and Trump began questioning the merits of trade even with allies such as Japan, however, many believed them to have crossed a line. It is one thing to attack China for “stealing” jobs but quite another to sell short a close and faithful ally.

Americans have long harboured schizophrenic attitudes on trade. In the Republican debate in Detroit, for example, the biggest applause went to Ted Cruz when he lamented how Detroit used to be “the Silicon Valley of America” – a city of “two million” with “the highest per capita income in the country” – and vouched to bring Detroit and America back to their former glory. Left politely unsaid, yet understood by every former auto worker in Detroit, is the fact that the adversaries that have so decimated Detroit hail not from low-wage countries such as China or India, but advanced economies such as Japan and Germany.

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Americans’ tendency to blame so many of America’s ills on trade – especially with “low-wage” nations – is perplexing, since such trade is supposed to be complementary rather than competitive. Consider the case of the iPhone and iPad. While these devices are labelled “Made in China”, Chinese labour accounts for only about 3 per cent of their overall value. According to one estimate, some 60 per cent of the proceeds of each iPhone or iPad sold go to Apple, with the bulk of the rest going to component manufacturers from Japan (34 per cent), Germany (17 per cent), and South Korea (13 per cent). If the point is to bring back “high-paying” jobs, why the fuss over the lowest-valued 3 per cent that even China is trying to ditch?

One reason for US populist fervour may be anachronistic methods of accounting for trade. As the “factory of the world,” China imports US$0.41 for every US$1 of export, leading its deficit numbers to be overestimated by 70 per cent on average. America’s bilateral deficit with China is probably inflated even more given that America imports mostly consumer electronics, clothing and machinery – which generally require China to import more materials and components.

China’s nominal deficit numbers hide other important metrics as well. As part of China’s steady “opening up”, for example, American companies have become intimately involved in all aspects of China’s export business. It is estimated that American-owned ventures in China today capture some 52.6 per cent of the value of all Chinese exports.

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Foreign companies have directly invested over US$100 billion annually in China for the last decade. Each time investors exchange their US dollar reserves for Chinese renminbi to invest, however, a current account deficit is recorded in China’s favour. China’s “huge” dollar reserve turns out to be more a result of trade liberalisation than “unfair trade”!

It is popular today to lament how trade has hollowed out American industry. Facts show, however, that American manufacturing productivity and capacity are at their highest in history; US manufacturing wages have remained strong as well.

Manufacturing jobs have decreased because the American economy has become more service-oriented. Even if America had isolated itself from trade, the regions of the nation focused on assembly jobs would have become disproportionately poor compared to the rest of the nation anyway.

Both American companies and American consumers are big winners in global trade. What America needs is a new social contract to ensure more of its workers participate and share in the fruits of the new economy.

One way is to encourage more investment in American workers. The US tax system makes it difficult for American companies to bring overseas profits back home to invest. Henry Ford – who saw high wages and investment in local communities as an investment in future profits – would have been appalled by this state of affairs.

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As the US reforms its tax code, it should also make it easier for foreign companies – especially Chinese companies, which are too often viewed with undue suspicion – to invest. Had Chinese leaders displayed the same level of paranoia that American leaders show today, few American companies would have been allowed to invest in China over the years, to the detriment of China.

Finally, America needs to invest in itself again. The US has developed an account deficit with the world over the last three decades because it has allowed its household savings to plummet and government deficits to soar. It currently has a bilateral deficit with all the major economies. Yet even as Japan, South Korea, Germany and others have emerged to build businesses that can beat the best from America, the US continues to play as if it were a unipolar world.

When Barack Obama boasts that the US spends more on defence than the next eight nations combined, it is a testament to America’s success as well as its ills. When defence secretary Ash Carter proclaims the TPP to be “indispensable” to America’s so-called pivot to Asia, comparing its ratification to stationing another aircraft carrier, the US proves just how difficult it is to reprioritise in a changing world.

To revitalise America for the long haul, the US must think more about building hospitals, schools and roads at home rather than deploying aircraft carriers abroad. It needs to reach out to rising powers like China to build new common ground for prosperity.

Allen Yu is adjunct fellow at the Chunqiu Institute for Developmental and Strategic Studies