And so this was a huge breakthrough. We took yes for an answer. We agreed to change our trading relations with China, to put our annual, normal trading relations with China onto a permanent basis and to welcome China into the World Trade Organization. This is a huge commitment by China to really overhaul many sectors of its economy, to engage in very ambitious economic reforms and subject its economy to a level of foreign competition that it has never before experienced.
It's a messy process. China isn't living up to all of its obligations to the letter, or even to the spirit in some cases. You've got conflicts between the central government and regional governments that may not have bought into what the central government agreed to. So you have a lot of mess, a lot of fog of reform. But in the big picture, stepping away from it, I think you have a very positive picture of China's ongoing integration into the world economy and the U.S.'s very wise facilitation of that trend.
So to put it in a nutshell ... you're saying that the thinking here in Washington was there was a great benefit to signing trade agreements with China in order to draw them further into the world market and to encourage reforms in China.
Absolutely. In previous years, we had allowed poor, underdeveloped countries into the GATT or into the WTO without many conditions at all. We just said, "If you want to come in and play in our club" -- which the GATT was originally a kind of rich countries' club -- but "If you want to come in and join, well, you can come in really without any conditions." And so many poor countries joined the GATT and participated in the GATT without really any obligations on their part. They had pretty much carte blanche to keep their markets closed, even while rich countries were opening theirs. So countries like India, who were GATT members, didn't do anything to open their economies.
But in the case of China, we set the bar quite high. We said: "China, you're a big economy. You're growing fast. If you want to come into the World Trade Organization, you need to put your money where your mouth is and adopt obligations that are commensurate with your place and role in the world economy." And China said yes. And I think, as I said, we were smart to take yes for an answer.
[What was the viewpoint in the U.S. in negotiating a trade agreement with China?]
The mind-set here: Every year since Tiananmen Square , we had an annual vote as to whether to have normal trade relations with China. Every year it passed. There was zero chance it was ever going to fail, because the economic dislocation to U.S. industries and U.S. consumers would've been too great. So we had a status quo that was re-upped every year.
The question facing Washington was, are you going to make this more or less automatic annual process permanent, in which case you're basically treating China exactly the same as you've been treating them in exchange for sweeping commitments to open China's market? I think it would've been crazy to turn down that offer.
What did the trade agreement with China do? ... Did it actually change the terms of our trade with China at our end in terms of access to the American market?
No, except at the margins. It made it a little easier for us to raise barriers against Chinese goods. So what we agreed to do was convert our annual, normal trade relations with China into a permanent status. So, in other words, we agreed to continue treating them indefinitely as we had been treating them year after year.
In addition, China agreed upon its entry into the WTO to allow us to set up a few additional trade barriers that could be used to block surges of Chinese goods. So basically, if you look at the permanent, normal trade relations agreement with China and compare that to what was going on before, we slightly closed our market relative to China, compared to how things had been before.
And what we did then was remove the annual review process?
So the theory that you had annual leverage to make the Chinese behave was--
Never really worked.
Well, never really worked, but if we gave up anything, that's what we gave up.
That's what we gave up.
There are some people who say that we had exaggerated expectations that we were going to sell a lot of goods to China; that we saw the Chinese making concessions, opening up their market, and we envisaged, really, a significant [increase] in American exports to China -- manufactured goods, services, what have you. What's your take on that?
I think since the 1800s, when the first European colonial powers started salivating about the Chinese market, there have been hyped expectations about the commercial potential of this huge market: "If every Chinese just bought one something, then we could make our fortune."
So do you think we had hyped expectations?
I think certainly some businesses have had hyped expectations. Many businesses have looked at China and bought into the idea that this was going to be a huge windfall for them, if they could crack the Chinese market. They've invested a lot in trying to serve the Chinese market, and then they haven't got a lot of profits to show for it, or maybe they even have some bad investments.
On the other hand, many companies have made very successful investments in China. And without a doubt, Chinese imports from the United States in particular and from the rest of the world have been growing very fast. Their exports to the United States have been growing even faster, but their imports have been growing very fast. And so that means additional business opportunities for a lot of U.S exports.
I don't think it was just business leaders who had these expectations. I've gone back myself, and others on my staff have gone back, and we found there are a number of quotations from a fellow named Clinton, and there are some others from folks on the other side of the aisle up on Capitol Hill. The expectation that we were going to get a lot of good business for our American companies -- not just exporting from China to here, but exporting from here to China -- was fairly general. [It] was a kind of a general frame of mind, wasn't it?
Yeah, I think so. And I think it has panned out. Whether everybody's expectations have been met or not I think depends on how extravagant their expectations were.
But has China been growing much faster than the world economy? Yes. Have Chinese imports been growing much faster than world imports? Yes. Has the U.S. gotten a good chunk of that business? Yes. Has China been attracting foreign investment? Has a big chunk of that been U.S. investment? Yes.
So why do we have a $120 billion trade deficit with China?
Because China is exporting more to us than it is importing from us. And that's an opportunity for Americans as well. All the Americans who were able to have much better Christmases for their kids because toys are cheaper now than ever before can thank trade with China. All the low-income people who are able to afford a better wardrobe because clothes are cheaper now than before can thank China. So there's a huge benefit on the import side.
We tend to focus on the cost, that imports clearly are a challenge to U.S. businesses that compete against those imports, 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, and that means they have promoted the welfare, the choice of American consumers, have helped their bottom line, have helped them be able to keep ends meeting. And so on the import side as well, there has been a big plus for Americans.
So Wal-Mart shoppers are better off?
Yes. Absolutely. Yes. There's 100 million people who go to Wal-Mart every week. That's a pretty big number. Those people go there because they think they can get a better deal there than anywhere else. One of the reasons they can get a better deal there than anywhere else is because of globalization and the ability of Wal-Mart to source low-priced, competitive products from places like China and elsewhere.
... But you do have people saying ... in the last decade or so, we've lost a million jobs to China because of the China trade. What's your take?
I think it's impossible to say that we've lost a million jobs to China. Over the last decade, American employment has gone up by almost 20 million. It went up 18 million from 1993 to 2002. We had a recession, and we have had a slow time coming out of that recession, as far as the job market is concerned. That has to do with a host of factors, of which international trade is one rather small component.
But why do you say it's impossible to say we've lost a million jobs to China, because you don't think it's true, or because it's hard to quantify, or what?
I think that trade policy or trade flows, one way or another, don't have an effect on overall employment numbers. 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.
So you can't look at gross numbers and have an intelligent conversation about the effect of trade on jobs. You have to look at the net effect. And for the job losses that are created or that are caused by trade, there are also corresponding jobs that are created that otherwise wouldn't have been. The net effect, most economists think, is a wash; that is that trade policy -- whether it's free trade or protectionist -- doesn't have an effect on overall employment.
Overall employment is driven by the size of the labor force and by the state of the macroeconomy, particularly monetary policy and fiscal policy, how they are affecting overall economic health. If you've got a growing population and a growing economy, you're going to have growing employment. Trade moves jobs out of particular sectors and into other sectors, and so it definitely changes the profile of jobs. But to say it's eliminating jobs and causing us to run out of jobs in our economy is looking at one side of the equation and not the other.
If you look at the profile of jobs -- and we happen to actually have been in some situations like the one I'm about to describe -- you do actually see exactly what you've described: some jobs eliminated and other jobs created. And we mentioned Wal-Mart before. In one of the towns that we went to, a major industrial factory, a Thomson Electronics TV plant [that had] been there a long time, 1,000 jobs eliminated. And lo and behold, what's literally being built in the field next door to this empty plant is a Wal-Mart Supercenter. … Your implication is there's a net wash, or there's maybe a net gain for us as a society. But if you look at those folks, they are looking at a hell of a net loss. They're looking at $15-, $16-an-hour jobs to, I don't know, $7-, $8-, $9-an-hour jobs, completely different benefits, and certainly a very different job-security kind of situation.
The net wash and the net gain accrue to the country as a whole. They do not necessarily accrue to a particular locality and certainly not to a particular household. Without a doubt, people lose their jobs because of foreign competition, and some of them have a tough time finding anything that was as good as what they had. And so those people have lost out because of foreign competition.
... One of the things that people do talk about is different models; that if you look at what some people refer to as the General Motors model, that you go back to the '40s, '50s and '60s, you look at the typical industrial jobs, with the wages and the benefits and the job security, you've got one model. And if you look at the Wal-Marts, or a little bit less, though, Costco, but Target and Kmart and so forth -- and Wal-Mart's emblematic here; it's not just Wal-Mart; we're using Wal-Mart as an important symbol, by the way, not suggesting it's absolutely unique -- that the Wal-Mart approach is very different. There's a lot of part-time work. There's a lot of labor turnover. There are low benefits, and there are low wages. ... Just looking at it from the worker side, have we moved, or are we in the process of moving, from one model, which has been predominant and fairly beneficial to millions or tens of millions of workers, to another model, which is less beneficial to large numbers of people?
We're moving to a different kind of American economy. There is no doubt that for the past quarter-century we have been in the midst of wrenching structural change -- structural change that, I would argue, on benefit, creates more opportunities than it eliminates. But for particular people in particular sectors or with particular job skills, it has meant downward mobility for them, and there's just no doubt that the creative destruction of market competition and capitalism creates winners and it creates losers.
And supporters of free markets and people who support market-friendly policies need to face up to that fact. There is a downside, and it goes far beyond international trade. If you look at jobs that have been eliminated because of foreign competition, they pale by comparison to the jobs that have been eliminated by automation and computerization. All kinds of factory jobs have been eliminated by robots, have been eliminated by computerization. All kinds of back-office, white-collar jobs have been eliminated in the same way.
Look at the steel industry, for example. Back in the early 1980s, it took 10 man-hours to produce one ton of steel. Now it takes about two man-hours to produce one ton of steel. There's a huge productivity gain, and yet our economy doesn't need any more steel than it used to. So if the demand is the same and the productivity is a lot higher, that means we need fewer steelworkers.
A great deal of that productivity increase has been driven by domestic competition -- in particular, the rise of the mini-mills that use recycled scrap to make steel in high-tech, not labor-intensive processes. So mini-mills have eliminated more steel jobs than imports have.
We hear about the unfair imports and how they are eliminating steel jobs. We don't tend to hear as much about the effect of pure, domestic technological innovation on jobs.
Why is that?
Because it's a lot easier to be demagogic when you can point to a foreign scapegoat and say, "See? All our problems would go away if we just went back to Fortress America." Whereas it's, I think, tougher to sell to people [the idea] that technological progress is bad for us. I think we understand that technological progress has costs, that it puts people out of work; it makes industries and jobs obsolete. But I think we have come to grips with the fact that it produces more opportunities than it eliminates.
Trade is just another form of technological innovation. It's a way of turning exports into imports. And so it's a way of increasing productivity, and at the same time, it eliminates some jobs. If you're against trade, you really, to be consistent, ought to be against technological innovation as well, because both are a threat to existing job patterns.
Speaking of threats, is China a threat to the American economy? Is it helping to deindustrialize the American economy?
No, it is not helping to deindustrialize the U.S. economy, because the U.S. economy isn't deindustrializing. From 1980 to 2002 -- so during the period of the rise of the Chinese economy -- U.S. manufacturing output has doubled. We're producing twice as much manufactured product today as we were back when China was just starting its economic reform.
But manufacturing as a share of GNP and manufacturing employment as a share of total employment, both of those have gone down.
They're both shrinking. And why? Is it because of the weakness of the U.S. manufacturing sector? No. It's because of the strength. Productivity in manufacturing is growing twice as fast as overall productivity. Over this 20-year period, manufacturing productivity has grown over 100 percent. Overall non-farm business productivity has grown about 50 percent. So productivity in manufacturing is growing faster than in the service sector, and yet demand for manufactured products isn't growing at the same speed.
As a result, manufactured goods are getting cheaper and cheaper relative to services, which means that the percentage of national income spent on manufactured business is declining. The percentage of manufacturing in GDP is declining. And also the percentage of manufacturing employees out of the total workforce is declining. That's not an indication of American economic weakness. It's an indication of American economic progress. ...
The exact same thing happened in agriculture over a longer time period. Back in the 1860s [and]1870s, half of our workforce was on the farm. Now it's under 2 percent, and yet we're producing more food than ever.
There are people who have argued -- and I think you've argued it, at least in some of the stuff that I've read -- that people were worried about the threat from Japan or Korea a decade ago, and then we recovered from that, and we're OK. I think one of the questions people ask now is, is China different because of the size of China, particularly the size of its labor market, its labor pool? ... Do you think China represents a different kind of trade challenge, if not a threat?
I think our experience with China is different from our experience and hysteria about Japan in the 1980s, and that's because the challenge is rather less than Japan represented. Japan's competitive challenge to the United States was in high-tech, high-profile industries and machine tools -- semiconductors, automobiles, steel.
China's inroads into the U.S. market are largely coming at the expense not of U.S. production, but of Mexican and Southeast Asian production. A lot of the jobs that China is displacing are jobs that left the United States a long time ago, and China is emerging to replace other low-wage countries doing labor-intensive operations.
Over the long, long haul, will China's economic development continue to the point that it reaches the level Japan was at in the 1980s? Maybe, but we're not there yet.
You don't see China going high-tech and going up the value chain? People are talking about laser equipment, talking about Internet equipment, aerospace stuff, as well as high-tech electronics. Laptops moved from Taiwan to China just literally in the last three years, not to mention furniture and lawn mowers and electronics and so forth.
China is definitely making economic progress. It's moving up the value chain. Most of its participation in high-tech industries, though, is at the low end. It's routine assembly and testing, not in R&D, design and the tougher parts of manufacturing.
So if China continues to grow -- and I think that's a big if -- it faces a lot of hurdles in its transition from communism to capitalism. If it continues to grow, then it will mount more of a competitive challenge to U.S. producers than it does currently. It will also provide many more opportunities for U.S. producers than it does currently. But right now, I would say that China is still largely a poor, backward country that competes mostly in low-wage, labor-intensive operations.
Let me ask you about the trade deficit for a moment. The trade deficit with China was $120 billion last year, $150 billion this year; people don't know exactly. But the trade deficit overall looks to be going towards maybe $600 billion this year. You've got people like Fred Bergsten, a very well-respected mainstream economist, saying: "This is potentially a disaster. This is something we need to worry about." Do we need to worry about the size of our -- and I'm not talking about just China -- do we need to worry about the size of our American trade deficit?
We don't need to worry about the size of our bilateral trade deficit with China or anybody else. Bilateral trade deficits don't matter at all, except politically. 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.
China, in particular, runs a huge trade surplus with the United States, but only a small trade surplus overall, and it may go into deficit soon.
According to Chinese figures.
And according to most economists who are studying China. So China's overall trade is pretty much in balance. That means that when it's exporting and earning dollars -- hard currency -- it's using those to buy goods from other countries rather than the United States.
So as far as our trade deficit is concerned, it's big right now. It's big by historical standards. And ultimately I think we will see it shrink over time. It can't continue to grow indefinitely.
Is it a danger?
The trade deficit itself isn't a danger. What it means is that we have a capital surplus. If you have a trade deficit, you have a capital surplus.
You mean people are putting money into--
Yes, if we are buying more from abroad than we are selling abroad, that means we are consuming more foreign capital than we are shipping abroad. They are two sides of an equation. So that means a lot of people are investing in the United States, and that's a good thing. It would be nice if the rest of the world were growing faster so that we could export more. It would be nice if Americans were saving more so we could fund our investment out of domestic savings, rather than having to be dependent upon foreign savings.
So the trade deficit relates to a number of important economic challenges. If the trade deficit gets big and then shrinks swiftly, that adjustment can cause dislocations in financial markets and in the overall economy.
But if it stays big and keeps getting bigger, is that a danger?
I don't think it can keep getting bigger forever. It's pretty big now.
But people said that when we were at $300 billion. We're now at $600 billion.
They said it in the 1980s. It went down some, and then it's gone back up some.
Is there a danger point in the trade deficit?
No, there's not a danger point in the trade deficit. There's no point at which you've entered some sort of danger area and you have to start changing policies to address it. There will come a point where the economic forces that are producing our current trade balance will shift, because that balance will have tipped in some way. And so either the rest of the world will start growing faster, in which case they need their capital there rather than sending it here, and in which case we're exporting more from them; or the dollar will decline, in which case our exports will be cheaper, and their imports will be more expensive. So there's all kinds of equilibrating mechanisms that will keep this from spinning wildly out of control.
You're saying there's automatic correction?
Yeah. The size of the trade balance is determined by market factors, by the demand for U.S. goods, by U.S. demand for foreign goods, by the demand for U.S. capital or U.S. assets. And a lot of these factors are equilibrated by the exchange rate of the United States. So ultimately, if the trade deficit gets too big, these factors will start equilibrating in the other direction.
The dollar starts falling?
The dollar will start to fall, and we'll export more; we'll import less. The rest of the world starts speeding up in growth. It will absorb more of its capital; we'll get less of it. And so--
We don't need to worry.
There's no need for any kind of direct policy intervention to affect the trade balance. It will take care of itself. ...
There's another thing that Wal-Mart gets credited with, and that is its enormous efficiencies, particularly in logistics, supply chain, distribution, warehousing, all that. And people talk about Wal-Mart adding to national productivity. What's your take on that? Do you think that Wal-Mart can be credited with improving the productivity nationally?
I think Wal-Mart is a leader in what we've seen generally in retailing, a leader in pioneering the use of information technology in retail to track exactly what people are buying and to feed that information directly to its suppliers, so that to an extent greater than ever before, Wal-Mart has exactly the right products on the shelves from exactly the right suppliers at exactly the right time to give consumers the best deal for what they want. And so without a doubt, Wal-Mart and those who have followed in its footsteps have improved the productivity of American retailing immensely, and that means shoppers get better bargains.
... Wal-Mart has a concept ... called the opening price point, which is their effort to find the rock-bottom price in any line of goods, whether you're talking about washing machines or lawn mowers or vacuum cleaners or clothes or what have you. ... In order to do this, they've put tremendous pressure on their suppliers to meet that. ... Do you have any sense, as an economist, of the role of the retail group as a whole -- because Target's doing the same thing, Costco to a lesser degree, Home Depot, Toys "R" Us, whatnot -- the impact of the retail group, led by Wal-Mart, on pushing American suppliers to those bottom prices and, in effect, pushing production overseas?
We've definitely seen a shift in the balance of bargaining power between manufacturers and retailers. Back in the old days, manufacturing was a high-productivity endeavor. Retailing and distribution was fairly low-productivity, and manufacturing was big, and consolidated retailing was small-scale and decentralized. And so manufacturers called the shots. They set what the prices would be. The retailers said, "Yes, sir."
Now things are very different. You have large-scale retailing that's very high-productivity, that has a lot of bargaining power. And they can go to smaller manufacturers and call the shots and say, "If you want to be on our shelves, you have to do it our way." And so, without a doubt, it's tough doing business for Wal-Mart. They're very demanding, and they've got a lot of bargaining clout to back up their demands.
It's said, though, in the industry, the only thing worse than doing business with Wal-Mart is not doing business with Wal-Mart.
Can you see Wal-Mart and its competitors actually pushing jobs overseas because of their drive for lower costs, particularly at these very low opening price points?
I think that happens. I think that Wal-Mart is putting downward pricing pressure on manufactured products. And so, in some cases, that can no longer be done at U.S. wage levels, and therefore, to fill Wal-Mart's needs, you need to source overseas. What that does, then, is create savings for consumers who buy those cheap goods at Wal-Mart. They've got more money in their pockets. They go buy something else. That something else then gives that business supplying that need more money than it had before. It's expanding. It's hiring workers.
So Wal-Mart is rearranging American jobs. It's pushing some overseas. It's creating some that wouldn't have existed before.
Actually, what's interesting is you were talking about two different models. One was a producer-driven economy. The other one is a buyer-driven economy. Is that what you're talking about? You're really talking about a shift from a producer-driven to a buyer-driven economy.
... We definitely have a more consumer-driven economy now than ever before, and it's a good thing. What's good for consumers and what's good for producers are two very different things. Consumers want lots of options and low prices. Producers want not many options and high prices. And so their interests conflict. What's good for producers or cartels: no innovation, no competition; just pluck the money off the money tree and not worry about anything. But that's not very good for all of us.
But we didn't exactly have a heavily cartel-ized economy 20 years ago.
No, but look, say, at the automobile industry: very fat and happy and lazy in the '40s and '50s. Not much innovation -- tailfins and new paint jobs, but not much change in the actual ride until foreign competition came along, gave Detroit the scare of its life. And we started getting a lot more consumer-driven automobile industry than we'd had before because of an infusion of competition.
Wal-Mart has infused a lot of competition into the distribution side of the economy, and that has then had ripple effects back into manufacturing. Some of that has caused offshoring of manufacturing to China and other low-wage countries. Some of it has caused automation of manufacturing that wouldn't have happened otherwise. All in all, it's improving the productivity of the overall American economy. …
You think of Wal-Mart -- $250 billion a year. That's a lot of concentrated buying power. So you put together with Target and Costco and Home Depot and so forth. They do have the power of decision over where things are produced.
Yeah, yeah. Relative to manufacturers, they have more bargaining power than ever before. Of course, they still compete with each other ferociously. The only reason Wal-Mart is top dog now is because it is winning in a very tough and very competitive game. As soon as Wal-Mart relaxes and starts allowing other retailers to be the price leaders, it's going to see its market share shrink -- and quick.
But still, Wal-Mart and the others [are a] big force in outsourcing.
It's a big force in rearranging the American economy, and outsourcing is one symptom of that.
Now, is outsourcing good or bad for the American economy?
Outsourcing is, overall, good for the American economy, and that is to take nothing away from the fact that it can hurt particular workers who have their jobs outsourced. But there's all kinds of ways that workers can lose their jobs. They can lose their jobs because of a downturn in the economy, because of domestic competition, because of automation and computerization or because of globalization and offshoring.
What the Department of Labor has found in recent surveys is about 2 percent of mass layoffs are due to outsourcing. That means 97 percent are due to something else. Those workers who get pink slips hurt just as bad as the workers who get pink slips because of [offshoring].
... Is Wal-Mart good for America?
I think Wal-Mart is good for America. Wal-Mart is doing what America is all about, the American market economy is all about, which is producing things consumers want to buy. And Wal-Mart is offering consumers a wide range of goods at rock-bottom prices, and therefore, it is meeting the market test.
It is not good for its competitors. They have a tough time keeping up. As far as its workers are concerned, everybody that's working at Wal-Mart, none of them were drafted. All of them chose to work at Wal-Mart, presumably because the opportunity they had at Wal-Mart was better than any other opportunity they had. If Wal-Mart vanished off the face of the earth tomorrow, that means those people would have to go to the next best option, and they would be worse off relative to where they are today. So as far as consumers are concerned and workers are concerned, Wal-Mart's a big plus for America. …