In the early 90’s, the Clinton administration provided trade
benefits to China. There was strong criticism against these moves based on
China’s human rights violations. However, President Clinton argued that expanding
trade would lead to better relations with the Chinese and eventually better
conditions for the Chinese people.
As trade with China increased, the Clinton economic team
realized something significant; they could achieve economic growth without increased
inflation. Usually, economic growth spurs inflation, which the Fed tries to
control with higher interest rates. This can eventually lead to recession.
However, in the Clinton 90’s, the economy grew without a recession
because we were able to “import deflation” from China. The toaster that priced
at $10 (made in Missouri) could now be purchased for $8 (made in China). Add up
the savings from a variety of everyday purchases and you are stretching the
family budget. Multiply the savings over millions of families, and poof! – much
of the inflation in the economy disappears.
Yes, the toaster jobs also began to disappear in Missouri,
but the dot-com boom was just heating up, so high-tech jobs were growing. This
began the transition of the U.S. from a low-tech workforce to a new, high-tech
workforce, a problem we still struggle with today.
You may consider “grow the economy and import deflation” a
short-term strategy with long-term difficulties. However, in U.S. political
cycles, you leave after eight years. So, whatever consequences are created
become someone else’s problem.
The convenient time for this policy to be evaluated,
controlled, modified, etc., would have been at the beginning of the Bush II
administration. But, the dot-com bubble burst in 2000. Whoops! – there went many
of those dot-com jobs, and a recession began in March 2001, followed closely by
the events of September 11. Taking any action at that time which disrupted the
economy or increased inflation (if you stopped importing deflation, for example)
could have proved disastrous. So, the Chinese policy continued.
In 2000, Congress did pass legislation promoting more
Chinese trade and, in
The Chinese imports increased through the aughts (00s).
Economists were confused about how the economy could be doing well with U.S.
employment growth so tepid, but it looks like the trade policy is partially to
blame. With manufacturing declining and the dot-com sector slow to recover,
there were few places to invest capital, so everyone poured massive amounts of
money into the housing market.
After the housing bust and Great Recession, the new Obama
administration could also not risk disrupting Chinese trade. The economic
recovery was very fragile for a few years and never great during the entire
eight years. So, the Chinese goods kept flowing. The Chinese were fortunate that economic and
world calamities prevented U.S. trade policies from being critically reviewed,
which enabled the cheap Chinese goods to keep flowing to U.S. consumers for
over 20 years.
The Trump administration reviewed the numbers and wondered
how we ever got into this precarious position. Today, we find ourselves in a
trade war, which involves much more discussion about intellectual property and
opening Chinese markets to U.S. goods than about slowing the flow of products
into the U.S. Why? We might as well face
it – we’re addicted to cheap Chinese goods. Yes, we love those low prices at Walmart
and online too! We have been buying the stuff for 25 years and we are hooked. This
is surely the “new normal”.
You might have thought the renewed interest in Chinese
trade would have revived the debate about human rights abuses. How about those
advocates protesting exploitation of Asian workers? What about the argument
that buying Chinese goods enriches a communist regime that may do us harm in
the future? Nope, nope, nope. Crickets! Why? We are addicted to Chinese goods
like a junkie on crack.
And the addicts are agitated because their “fix” might
increase in price 10% due to the tariffs -- a 25% increase would be horrible! Of
course, the simple calculations for the tariff’s impact on prices are always
overstated due to the law of supply and demand and the fact that consumers will
seek substitute goods.
In this highly politicized culture, the Chinese tariffs
will either destroy our economy or have very minimal impact, depending on your
attitude towards Trump. Of course, the truth is somewhere in between. However,
the tariffs and trade negotiations have greatly increased business uncertainty,
which is always detrimental to the economy. Therefore, it is beneficial to the
U.S., China and, yes, the cheap-Chinese-goods addicts for this trade deal to be
signed as soon as possible.
