We’re Addicted To Cheap Chinese Goods

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

2001, China was admitted to the WTO (World Trade Organization). The hope was that this would lead to China buying more U.S. goods, thus reducing the now-ballooning trade deficit. But this move only accelerated the import of Chinese goods. The Economic Policy Institute estimates that 3.4 million U.S. jobs have been lost since the WTO action. We may have imported deflation, but we also exported production jobs. Somewhere along the line, that Missouri toaster factory was toast.

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.

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here