China's Manufacturing Job Losses Are Not What They Seem

August 29, 2019 3:15 PM
Photo Credit: 
REUTERS/Stringer

President Donald Trump’s latest misrepresentation about the Chinese economy would have you believe that China’s manufacturing sector is on the ropes and that President Xi Jinping has no choice but to yield to US demands on trade. In July 2019, for example, President Trump tweeted that China has lost 5 million jobs, with 2 million lost in manufacturing, as a result of his tariffs. At the end of the G-7 meetings in Biarritz in August 2019,  he said, “They lost 3 million jobs in a short period of time," using a lower number.

This claim is delusional.  What are the facts?

To start with, consider scale. A loss of 5 million jobs over the course of a year in the United States, where nonfarm employment is 150 million, would be a catastrophe. But in China not so much: Total nonfarm employment there is 570 million, almost four times that in the United States.

What is the basis for the figure of 5 million? The figure appears to have been taken from a publication of a well-known Beijing-based Chinese securities firm, China International Capital Corporation Limited (CICC). It estimates that combined employment in mining, manufacturing, utilities, and construction, an aggregate the firm refers to as “broad manufacturing,” has fallen by 5 million since July 2018, when President Trump first imposed tariffs.[1] But CICC also shows that employment in broad manufacturing shrank by 23 million between 2015 and 2017, a decline of almost 8 million a year. So, the contraction of employment in broad manufacturing has not increased since the trade war began in July 2018. Instead it appears to have slowed.

Rather than trade, the decline in employment in this part of the Chinese economy primarily reflects improved labor productivity and the slowing growth of broad manufacturing relative to services, which have become an increasingly important contributor to China’s growth. Total employment continued to expand throughout this period because of rapidly expanding demand for labor in services.

Since 95 percent of China’s exports are manufactures (narrowly defined), we need to focus on manufacturing employment. But, as my colleague Robert Lawrence has analyzed, China’s manufacturing employment has been declining since 2014, and it is quite likely that, like other industrialized countries, China is past the peak of manufacturing employment. Official data show China’s manufacturing employment in urban areas declined by 4 million between 2014 and 2017, confirming Lawrence’s finding.

Looking more directly at trade, while Chinese exports to the United States have fallen by 13 percent or about $30 billion since tariffs were first imposed in mid-2018, its exports to the rest of the world have expanded by more than enough to offset the loss of sales to the United States. Measured in terms of yuan, China’s global exports in the first six months of 2019 were up 6.1 percent over a year ago, just before the United States first imposed tariffs.[2]

Total sales in the subsectors of manufacturing most exposed to the tariffs imposed by the United States in July and September 2018 have grown rather than fallen.  While employment in these exporting subsectors has fallen, the decline is smaller than the average for manufacturing as a whole.[3] Thus, the gradual decline in manufacturing employment that began in 2014 continues.  But if tariffs are the primary cause, then why is employment falling more slowly in tariff-exposed subsectors?

The assertion that China is suffering from a crisis of employment as a result of the tariffs imposed by the United States is, therefore, not based on the evidence. Employment in broad manufacturing has been falling over the past year, but at a slower pace than in 2014–17, before the tariffs were imposed. China’s exports to the rest of the world are growing enough to more than offset the lost sales to the United States, so employment losses due directly to the trade war seem to be de minimis. Basing trade policy on a bogus premise may be an effective way to sell it to the US public, but it is hardly likely to work with the Chinese.

Notes

1. CICC, How Vulnerable Is Manufacturing Employment to External Demand Changes?
Macroeconomy Research, July 23, 2019, available at Wind Financial Information (accessed on August 25, 2019).  

2. Based on data from China’s General Administration of Customs, www.customs.gov.cn (accessed on August 27, 2019).

3. This analysis is based on monthly industrial enterprise data through May 2019 and thus does not reflect the effect of the tariff increase from 10 to 25 percent on the $200 billion list of products first subject to tariffs in September 2018. This tariff increase announcement was made on May 10, 2019, but goods shipped prior to that date were not subject to the higher tariff if they arrived at the US port before June 15 and goods shipped after May 10 were subject to the higher tariff as soon as they arrived at the US port. CICC, How Vulnerable Is Manufacturing Employment to External Demand Changes? Macroeconomy Research, July 23, 2019.