China's Entry Into WTO Benefits U.S. Consumers and Producers
The U.S. Trade Representative says it was a mistake to admit China to the World Trade Organization (WTO), a move that he says has seen China move further away from the global economy. The facts, including prices at the shopping aisles and in U.S. supply chains, say otherwise.
The statement by USTR Robert Lighthizer reverses more than two decades of bipartisan policy in Washington towards China’s 2001 accession to the WTO, characterized by both Democratic and Republican policymakers arguing that China’s WTO membership has helped bring Beijing into the global trade fold.
But despite Lighthizer’s accusations, the facts make it clear that China’s entry into the global economy has brought down prices sharply, both for end-use consumers and for producers sourcing the cheapest inputs possible. The notion that China’s export growth from 2000-2006 caused negative impacts on employment and wages in the United States received a boost in a paper five years ago by several academics, including MIT economist Daron Acemoglu. However, the “China trade shock” that was blamed for shedding of jobs and reduced wages in the United States has been at least offset by the “China price shock” that has reduced costs for Americans, U.S. producers, and others in developed economies.
In other words, if it hadn’t been for China’s membership in the WTO, prices at the local Walmart would be a lot higher – and the range goods available to average Americans would be narrower. Moreover, U.S. domestic companies that use China-made inputs are significantly more competitive on price than they would be without the China option.
The economic advantages of trading with China become clear when one reads a report by the Federal Reserve Bank of New York. The report pointed out that dramatically increased trade with China reduced the U.S. manufacturing price index by 7.6 percent between 2000 and 2006.
The first step in the Chinese manufacturing and exporting renaissance was actually the reduction of the country’s import tariffs, making it easier for Chinese manufacturers to import the foreign-sourced inputs that are essential to the country’s productivity. This, in turn, allowed Chinese manufacturers to reduce export prices to the United States, benefiting both households and firms, both through the direct impact of lower input tariffs and the indirect impact of improved total factor productivity.
In fact, the paper by the New York Fed found that at least two-thirds of the impact of China’s joining the WTO on the U.S. price index was achieved through China lowering its own tariffs on intermediate inputs. When China joined the WTO in December 2001, it committed itself to bind all import tariffs at an average of 9 percent, down significantly from average tariffs of 15 percent, with a large standard deviation of 10 percent.
During the period leading up to China’s WTO entry, the country implemented many other reforms that may have affected its productivity and exports, including liberalization of regulations governing foreign direct investment (which had previously been completely prohibited in some areas), and lifting requirements for import licenses. While roughly 5 percent of products were subject to license control in 2000, that dropped to 1 percent in 2006.
The Government of China’s decision late last year to unilaterally reduce tariffs on almost 200 consumer products – the latest of four rounds of tariff reduction by China, going back to 2015 – provides further evidence of the positive impact of China joining the global economy. In fact, after years as the world’s biggest exporter, China is on track to soon becoming the world’s biggest importer, according to a paper prepared by two leading economists for the China International Capital Corporation, the country’s first joint venture investment bank.
From its recent model based on low-cost manufacturing and massive exports, the Chinese government is looking to stimulate domestic consumption as part of its wider strategy to restructure the economy. Chinese consumers have been demonstrating an insatiable demand to do what consumers do when they can afford it – consume.
Rather than pursue a mercantilist policy focused entirely on driving up exports (and curbing imports), China is looking outward, incrementally making it cheaper and easier for Chinese consumers to shop and spend on foreign products as well as domestic ones.
The decision to admit China to the WTO has hastened a process that has benefited consumers in the United States and throughout the industrialized world: It has brought prices down, and created a big new market. The last thing the USTR should be trying to do is short-circuit that process.