On August 23rd, the Economic Policy Institute released a briefing paper, “The China Toll ? Growing U.S. trade deficit with China cost more than 2.7 million jobs between 2001 and 2011, with job losses in every state, written by Robert Scott.

“Between 2001 and 2011, the trade deficit with China eliminated or displaced more than 2.7 million U.S. jobs, over 2.1 million of which (76.9 percent) were in manufacturing. These lost manufacturing jobs account for more than half of all U.S. manufacturing jobs lost or displaced between 2001 and 2011.”  The growing trade deficit with China has been a prime contributor to the crisis in U.S. manufacturing employment. When you take into account the multiplier effect of manufacturing jobs creating 3-4 other jobs, this explains why we have had a virtually jobless recovery since the end of the recession and why the unemployment rate has stayed so high for so long.

The growing trade deficit between China and the United States since China entered the World Trade Organization in 2001 has had a disastrous effect on U.S. workers and the domestic economy. It has cost jobs in all 50 states, as well as the District of Columbia and Puerto Rico.

“A major cause of the rapidly growing U.S. trade deficit with China is currency manipulation. Unlike other currencies, the Chinese yuan does not fluctuate freely against the dollar. Instead, China has tightly pegged its currency to the U.S. dollar at a rate that encourages a large bilateral trade surplus with the United States.”

China’s currency should have increased in value as its productivity increased, which would have created balanced trade. But, the yuan has remained artificially low as China acquired dollars and other foreign exchange reserves to further depress the value of its own currency. The paper explains “To depress the value of its own currency, a government can sell its own currency and buy government securities such as U.S. Treasury bills, which increases its foreign reserves.”

As a result of pressure for action on China’s currency manipulation, the Ryan-Murphy Currency Reform for Fair Trade Act (H.R. 2378) was approved by the House of Representatives on September 29, 2010, in the 111th Congress, but it did not pass the Senate. Last year, the Senate passed a similar bill, the Currency Exchange Rate Oversight Reform Act of 2011 (S. 1619), authored by Sen. Sherrod Brown (D-Ohio), but a similar measure introduced in the House by Rep. Sander Levin (D-Michigan) with strong bi-partisan support from 234 cosponsors is being held up by the House leadership. “These bills would revise the Tariff Act of 1930 to include a “countervailable subsidy” that would allow tariffs to be imposed on some imports from countries with a ‘fundamentally undervalued currency’.”

Scott identifies several other Chinese government policies that also illegally encourage exports:

• Extensive suppression of labor rights, lowering manufacturing wages of Chinese workers by 47 percent to 86 percent
• Massive direct export subsidies provided to many key industries
• Maintaining strict, non-tariff barriers to imports

The EPI paper states, “As a result, China’s $398.5 billion of exports to the United States in 2011 were more than four times greater than U.S. exports to China, which totaled only $96.9 billion…making the China trade relationship the United States’ most imbalanced by far.”

Scott believes that another crucial missing link is foreign direct investment (FDI) and outsourcing, about which I have written extensively in my ownbook and articles. He writes, “FDI has played a key role in the growth of China’s manufacturing sector. China is the largest recipient of FDI of all developing countries…Foreign-invested enterprises (both joint ventures and wholly owned subsidiaries) were responsible for 52.4 percent of China’s exports and 84.1 percent of its trade surplus in 2011…Outsourcing—through foreign direct investment in factories that make goods for export to the United States—has played a key role in the shift of manufacturing production and jobs from the United States to China since it entered the WTO in 2001. Foreign invested enterprises were responsible for the vast majority of China’s global trade surplus in 2011.” This includes investments by American corporations in their plants in China.

Another factor that has contributed to the trade deficit is that the expectations of a growing Chinese market for U.S. goods failed to occur. The U. S. was supposed to benefit from increased exports to a large and growing consumer market in China. Instead, “the most rapidly growing exports to China are bulk commodities such as grains, scrap, and chemicals; intermediate products such as semiconductors; and producer durables such as aircraft and non-electrical machinery…”

The paper provides a detailed analysis of trade and job loss by industry to show “the employment impacts of the growing U.S. trade deficit with China using an inputoutput model that estimates the direct and indirect labor requirements of producing output in a given domestic industry. The model includes 195 U.S. industries, 77 of which are in the manufacturing sector…”

The rapidly growing imports of computer and electronic accounted for 54.9 percent of the $217.5 billion increase in the U.S. trade deficit with China between 2001 and 2011. “…the trade deficit in the computer and electronic products industry grew the most, and 1,064,800 jobs were displaced, 38.8 percent of the 2001–2011 total.” As a result, the hardest-hit congressional districts were in California, Texas, Oregon, Massachusetts, Colorado, and Minnesota, where jobs in that industry are concentrated. Some districts in North Carolina, Georgia, and Alabama were also especially hard hit by job displacement in a variety of manufacturing industries, including computers and electronic products, textiles and apparel, and furniture.

The three hardest-hit congressional districts were all located in Silicon Valley in California, and of the top 20 hardest-hit districts, seven were in California, four were in Texas, two in North Carolina, two in Massachusetts, and one each in Oregon, Georgia, Colorado, Minnesota, and Alabama.

According to Scott, “The composition of imports from China is changing in fundamental ways, with serious implications for certain kinds of high-skill, high-wage jobs once thought to be the hallmark of the U.S. economy. China is moving rapidly “upscale,” from low-tech, low-skilled, labor-intensive industries such as apparel, footwear, and basic electronics to more capital- and skills-intensive sectors such as computers, electrical machinery, and motor vehicle parts. It has also developed a rapidly growing trade surplus in high-technology products.”

This growth of trade in advanced technology products (ATP) is of serious concern because it includes the more advanced elements of the computer and electronic products industry, as well as other sectors such as biotechnology, life sciences, aerospace, nuclear technology, and flexible manufacturing. It also includes some auto parts ? China has surpassed Germany as one of the top suppliers of auto parts to the United States.

“In 2011, the United States had a $109.4 billion trade deficit with China in ATP, reflecting a nine-fold increase from $11.8 billion in 2002. This ATP deficit was responsible for 36.3 percent of the total U.S.-China trade deficit in 2011. It dwarfs the $9.7 billion surplus in ATP that the United States had with the rest of the world in 2011…”

This increase in ATP is mainly the result of foreign direct investment and outsourcing by   U. S. corporations that have set up manufacturing in China or are using Chinese manufacturers as vendors so that products they make in China are imported for sale domestically that these corporations previously made in the U. S.

The growing U.S. trade deficit with China has displaced millions of jobs in the United States and contributed heavily to the crisis in U.S. manufacturing employment. At the same time, “the United States is piling up foreign debt, losing export capacity, and facing a more fragile macroeconomic environment.”

Scott writes, “The bottom line of the influences discussed above is this:  As a result of China’s currency manipulation and other trade-distorting practices (including extensive subsidies, legal and illegal barriers to imports, dumping, and suppression of wages and labor rights), the increase in foreign direct investment in China and related growth of its manufacturing sector, and the absence of a growing market for U.S. consumer goods in China, the U.S. trade deficit with China rose from $84.1 billion in 2001 to $301.6 billion in 2011, an increase of $217.5 billion…” ? a 72 percent increase!

He concludes, “Unless China raises the real value of the yuan by at least a third and eliminates these other trade distortions, the U.S. trade deficit and related job losses will continue to grow rapidly…The U.S.-China trade relationship needs a fundamental change. Addressing the exchange rate policies and labor standards issues in the Chinese economy is an important first step. It is time for the administration to respond to the growing chorus of calls from economists, workers, businesses, and Congress and take action to stop illegal currency manipulation by China and other countries.” If elected representatives will not serve the interests of the American people, then they need to be replaced by ones who will in the next election!