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trade with china: expectations vs. reality by ned barkerhome
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A closer look at the debate over U.S. trade with China: What has been the result of permanent trade relations and China's entry into the World Trade Organization, how much does the trade deficit matter, do the Chinese have unfair advantages and what's the outlook going forward?

In the late 1990s, Washington was a sharply divided political city, but there was a growing consensus on one big issue. Most Republicans and Democrats agreed that trade with China would be a boon for America.

President Clinton summed up the mainstream consensus in Washington with a message to Congress in the spring of 2000. In a letter circulated to House members, he wrote, "China with more than a billion people is home to the largest potential market in the world… If Congress makes the right decision, our companies will be able to sell and distribute products in China made by American workers on American soil, without being forced to relocate manufacturing to China. …We will be able to export products without exporting jobs."

Clinton was pushing Congress to permanently normalize trade relations with Beijing, helping to ease China's entry into the World Trade Organization (WTO). Big business was furiously lobbying Capitol Hill in favor of the legislation. It saw China, with its 1.2 billion consumers, as a vast new emerging market and many parts of Corporate America wanted a piece of the action.

Just weeks before the legislation received the president's signature, Robert Burt, chairman of the Business Roundtable, an association of CEOs of leading American corporations, spoke boldly about the future. "This historic legislation will be remembered as the key that opened the door for America to sell its products and services to the world's largest emerging marketplace," he declared.

Other executives around the U.S. were equally strong in supporting U.S. trade with Beijing, and China's efforts to get into the WTO because they reasoned that China would then be required to play by the same trading rules as the WTO's other members. Moreover, as Europeans rushed to do business in China, American corporate captains did not want to be left behind. They worried that unless the U.S. backed the move, they would lose out to the Europeans, a worry Chinese officials played upon effectively from time to time during the 1990s.

On Capitol Hill, legislation to normalize trade with China got overwhelming bipartisan support in the Senate, where it passed, 83 votes to 15. Even in the House, where Democrats were split on the issue, the president received support from three-quarters of the Republicans, and the legislation passed by a wide margin, 237 to 197.

President Clinton signed the legislation at the White House in early October, and China joined the WTO 14 months later, on Dec. 11, 2001.

So How Did the U.S. Trade Opening with China Work Out?

For many, America's trade with China has not lived up to the enthusiastic advance billing from the Clinton administration, its Republican supporters on Capitol Hill and Corporate America.

Expanded trade with China has, in fact, been a blessing for large U.S. multinationals like Boeing, Caterpillar, and Cargill, which had trumpeted the prospect of a massive Chinese market for American products and services. China is the world's fastest growing market for commercial aviation, and needs billions of dollars worth of airplanes from Boeing. Its growing infrastructure has been a boon for companies like Caterpillar, which produces tractors and other heavy equipment. And it is importing billions of dollars worth of farm products, a boon to companies like Cargill. Last year, China bought $2.9 billion worth of soybeans -- the top U.S. export crop to China. China also has proven to be a growing market for U.S.-made fertilizer and chemicals.

But China has been a tougher market to crack for smaller and mid-sized American companies, like those selling bicycles, vacuum cleaners, and lawn mowers, who face stiff price competition from Chinese manufacturers of these products. And they also face discriminatory rules, burdensome red tape, language difficulties, and a population that earns only a fraction of what U.S. consumers make, and therefore lacks the purchasing power to buy consumer goods made in America.

Yvonne Smith, the communications director at the Port of Long Beach, literally sees the imbalance in U.S.-China trade. She reports that through Long Beach alone, the U.S. is importing $36 billion in goods yearly from China and exporting just $3 billion. By her account, the mix of products is very unfavorable to the U.S.

"We export cotton, we import clothing," Smith reports. "We export hides, we bring in shoes. We export scrap metal. We bring back machinery. We're exporting waste paper, we bring back cardboard boxes with products inside them."

Overall, the U.S. trade deficit with China reached a record $124 billion dollars in 2003 and the figure is headed even higher this year. Today, U.S. imports from China outpace U.S. exports to China by more than five to one, and the deficit shows no signs of abating.

These deficits are much larger than the trade deficits that the United States experienced in the 1980s and 1990s with Asian trading partners such as Japan. Put in historical perspective, America's current trade deficit with China is roughly double what it was at its height with Japan in the mid-1980s, when trade frictions between the U.S. and Japan led Sen. Lloyd Bentsen (D-Texas) to famously declare on the floor of the U.S. Senate: "We're in a trade war, and we're losing it."

Does the Trade Deficit with China Matter?

Economists disagree about the significance of the U.S. trade deficit with China. The U.S.-China Economic and Security Review Commission, a 12-member panel set up by Congress several years ago to report annually on our relations with China, says the burgeoning trade deficit is a matter of "long-term economic health and national security" for the U.S.

Conservative economist Paul Craig Roberts, who served in the Reagan administration, predicts the trade deficit will cause a crash of the U.S. dollar before long, and warns that the U.S. will wind up having a third-world economy, supplying raw-materials to other countries, who then ship back finished goods to the U.S. Economist Larry Mishel, president of the liberal Economic Policy Institute, contends that the trade deficit with China has cost the United States more than a million jobs over the past decade.

But free-traders like Washington Times columnist Bruce Bartlett argue that the U.S. can afford high trade deficits with countries like China because China and other countries from which we buy consumer goods turn around and invest roughly $500 billion a year of their capital in the U.S. economy.

"Economic theory tells us that if we ever reach the point where it becomes a problem, there is an automatic adjustment mechanism, which is that the dollar will fall in value," Bartlett says. "When the dollar falls, then that makes U.S. exports cheaper on the international market in terms of foreign currencies and it makes imports more expensive in terms of dollars."

Brink Lindsey, economist and vice president for research at the libertarian Cato Institute in Washington, adds that the bilateral trade deficit with China should not worry Washington. "Bilateral trade deficits don't matter at all -- except politically," Lindsey asserts. "It's an eyesore, politically, that we sell less to China than we buy. And it drives up protectionist pressures, so in that sense it's something to be concerned about. But as far as economic fundamentals, the fact that we run a trade deficit with China doesn't particularly matter. What matters is our overall trade balance."

However, it is the overall trade balance, now running at more than $500 billion a year, that worries some on Wall Street, as well as economists such as Larry Mishel.

"We have a trade deficit now that's running around 5 percent of GDP," says Mishel. "This is very large by historical standards, and you run the risk of foreign investors losing confidence in the United States, pulling back from the dollar, the exchange rate falling, and interest rates rising, and all that could cause a major recession in the United States."

Another reason for concern about the trade deficit with China among American industrialists and the U.S. labor movement is the size of China's massive population. With a workforce that is far larger than the combined populations of Japan, Korea and the other so-called "Asian Tigers," China is fast becoming the world's primary factory, producing everything from footwear, clothing, furniture, toys, and computers to big-screen television sets, lasers, space components and huge port cranes.

Analysts concerned with long-term U.S. economic security see China's seemingly inexhaustible supply of cheap labor, coupled with the Chinese government's commitment to a rapid development strategy and the movement of Chinese industries into high-tech sectors, as posing a long-term threat to American producers across the board.

Is There a Level Playing Field?

Some critics of U.S. trade policy with China complain the main problem is that the commercial playing field is tilted toward China. Alan Tonelson, a research fellow at the U.S. Business and Industry Council, an association of small and mid-sized businesses, says the Chinese government gives its companies huge advantages. "They subsidize land costs," he says. "They forgive taxes, they subsidize fuel costs, and they also give a subsidy when you export. We don't subsidize exports at all. We don't subsidize production."

Many American trade lawyers agree with the U.S.-China Economic and Security Review Commission, which gives China poor marks on living up to its trade obligations under rules of the World Trade Organization, and urges the Bush administration to pressure Beijing on a number of issues, including the country's exchange rate policies, which has a big impact on the cost of its exports.

China's currency, which is pegged to the U.S. dollar, is a major point of contention with many U.S. manufacturers and trade groups. Skip Hartquist, an attorney at Collier Shannon Scott, a Washington law firm that specializes in international trade matters, estimates that Chinese manufacturers get an unfair advantage because the Chinese currency is undervalued by about 40 percent, making Chinese products much cheaper for Americans to import. Many American manufacturers share this view.

Americans in industry and in Congress are not alone in calling on China to revalue its currency and let it float freely on the market. The International Monetary Fund appealed in September for the Chinese to uncouple the Chinese yuan from its fixed rate to the dollar. Rodrigo de Rato, the IMF Managing Director, declared: "There should be more flexible currencies, not only for China but the whole of Asia."

Privately, the Bush administration has added its voice for Chinese currency revaluation, but without pressing the issue vigorously in public. Some administration economists fear a run on the yuan and a bank collapse in China if exchange rates are altered too quickly.

Is Chinese Dumping Hurting U.S. Industry?

Another major source of friction between the U.S. and China has been the fairly frequent American charge that Chinese producers are guilty of dumping -- that is, producing exports and selling them in the U.S. below the price in China, or below what it costs to manufacture and ship abroad.

In recent years, U.S. companies in a variety of industrial sectors have brought trade complaints to the International Trade Commission (ITC), an independent, nonpartisan, quasi-judicial federal agency in Washington that provides trade expertise to both the legislative and executive branches of government, determines the impact of imports on U.S. industries, and directs actions against certain unfair trade practices, such as patent, trademark, and copyright infringement. The American companies have accused Chinese companies of dumping everything from shrimp to household goods like brushes and plastic bags, from tissue paper and bedroom furniture to color television sets.

"It's not a matter of China versus the U.S.," says Hartquist, who has represented several American companies in anti-dumping cases against the Chinese. "It's a matter of the Chinese producers are pricing their products in a manner that simply doesn't allow anybody else in the world to compete with that, and that's not fair," he says.

Earlier this year, the ITC gave relief to a company Hartquist represents, Five Rivers Electronic Innovations, located in Greeneville, Tenn. It employs more than 700 workers, and is the last American-owned color TV maker in the U.S.

In May 2003, Five Rivers filed an anti-dumping petition in Washington, charging that color television makers in China were illegally dumping their larger-sized color sets in the U.S., thereby threatening to put Five Rivers out of business. The company tracked TV imports from China and found that sales of the Chinese televisions skyrocketed from just over 50,000 sets in 2001 to 1.5 million sets during the first nine months of 2003.

Last December, Five Rivers CEO Tom Hopson told a congressional committee, "Imports of large screen TVs from China have created havoc in the U.S. marketplace. In my 24 years in the television business, I have never a similar or more worrisome situation."

In May 2004, the ITC unanimously agreed that the surge of these imports from China had injured Five Rivers, and then imposed duties averaging about 23 percent on these sets.

Hopson says without the decision, Five Rivers would have gone out of business. "I strongly believe that we would have already closed this factory," he says. "Had we not found the data … we would have looked very strongly at … laying our employees off."

The Current Political Debate in Washington

Although the ITC is an important forum for resolving individual trade disputes, it does not set U.S. trade policy. The White House, the Department of Commerce, the U.S. Trade Representative, and Congress are the leading policy players, and in the four years since President Clinton signed the permanent normal trade relations agreement with China, Republicans and Democrats have clashed over how to implement it.

Sen. Fritz Hollings (D-S.C.) and Rep. Sander Levin (D-Mich.), a leading member of the House Ways and Means Committee, have charged President Bush and his administration with a lax approach to trade with China. Hollings has warned of the imminent collapse of the Carolina textile industry under the pressure of Chinese competition. Levin has called on the administration to publicly cite China for manipulating its currency, police China's adherence to trade agreements more vigorously, and trigger various safeguard provisions designed to protect American industries.

"We have failed to make trade more of a two-way street," Levin asserts. "There is within the administration … the thought that the more trade the better, and it doesn't matter how it is done. It's a kind of hands-off approach to trade."

Republicans from rust-belt states like Ohio and Pennsylvania have also urged more vigorous defense of U.S. manufacturing. Sen. George Voinovich (R-Ohio) has bemoaned his state's double-digit job losses in manufacturing in the last few years, and he has introduced legislation calling for a more aggressive approach by the U.S. Treasury Department in dealing with China's currency practices. Rep. Phil English (R-Penn.) has introduced several bills to give the Treasury Department, the Department of Commerce, and the U.S. Trade Representative new tools and more authority to level the economic playing field with China.

In response, the Bush administration and its supporters have pointed to the benefit to American consumers from a flood of low-cost Chinese imports.

"We tend to focus on the cost, that imports clearly are a challenge to U.S. businesses that compete against those imports, says Brink Lindsey of the Cato Institute. "But we can't forget that those imports didn't just wash up here on American shores unbidden. They came here because people wanted to buy them," he argues.

In addition, the administration has taken action to aid U.S. apparel makers recently by limiting Chinese imports of knit fabrics, robes and bras. Earlier this year, it filed its first formal complaint against China at the WTO, accusing Beijing of giving illegal rebates to domestic semiconductor producers -- tax breaks that weren't available to exporters of these products to China.

In March, U.S. Trade Representative Robert Zoellick issued a statement asserting that, "As a WTO member, China must live up to its WTO obligations; it cannot impose measures that discriminate against U.S. products." The issue was soon resolved when China agreed to end the practice of illegal rebates to Chinese semiconductor producers.

On larger issues, such as the charge that the Chinese government is manipulating its currency to gain a trade advantage, the administration has moved cautiously. Treasury Secretary John Snow is reported to have raised the currency issue in high-level private talks, but the administration has been hesitant to press the Chinese hard, arguing that quick currency changes could upset China's precarious banking system.

On another tack, the administration has tried to reduce the trade deficit by trying to boost U.S. exports to China. Exports have increased significantly in the past few years, but not nearly as much as the flood of Chinese imports to the U.S.

What's the Outlook?

Controversy over the issue of trade with China seems destined to sharpen in the second Bush administration, as America's trade deficit with China rises still further and as more industries are hit by competition from China.

The single most significant challenge that looms immediately on the economic horizon is the scheduled lifting of worldwide textile quotas at the end of 2004. American textile experts and other economists warn that once the quotas are gone, China's cheap labor market will act as a magnet, drawing in millions of textile and apparel jobs from around the world, and eliminating hundreds of thousands of jobs in the U.S. at companies making products as diverse as sheets, towels, pillowcases, t-shirts, and socks.

Some U.S. textile groups predict a flood of trade cases in Washington to try to prevent the shift in U.S. jobs before it gains dangerous momentum. Retailers and importers, however, say protectionist moves won't help workers. They contend that in the long run, such measures will only hurt consumers.

Others, such as Alan Tonelson of the U.S. Business and Industry Council, argue that the U.S. needs to change course and raise trade barriers. "We have to recognize that our trade and manufacturing crisis has become so grave that we have no choice but to start thinking seriously about restricting trade in various ways," Tonelson asserts.

He contends that the majority consensus on the benefits of trade with China was wrong a few years ago. "China had too much production power and too little consumption power to be digested into the world trading system all at once," he says. To Tonelson, this is why the U.S. is hemorrhaging jobs to China.

Free-traders like Brink Lindsey of the Cato Institute take issue with that assessment. "Trade policy, or trade flows, one way or another don't have an effect on overall employment numbers," says Lindsey. "They affect the kinds of jobs we have. And so some number of jobs have definitely been eliminated because of Chinese competition. Elsewhere in the economy, other jobs have been created because of Chinese competition. Because American consumers have saved at Wal-Mart buying Chinese goods, they've got more money in their pocket to buy something else, which creates business opportunities for those other business, which means they hire workers they would not have hired, otherwise. The net effect, most economists think, is a wash."

But there is no consensus on that view either. "Theoretically, the gains from trade offset the losses from trade," observes Larry Mishel, president of the Economic Policy Institute. "But nothing says there were more winners than losers, and nothing says that for the bottom three-fourths of America that they are net gainers. In fact, I believe that most people have been losers from trade."


Ned Barker is the associate producer on "Is Wal-Mart Good for America?"