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How Free Trade Agreements Lead to Job Loss and Wealth Gaps

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Since the year 2000, the United States has lost over 5.5 million manufacturing jobs, nearly 50,000 manufacturing companies, and racked up an annual trade deficit with China of $273 million in 2010, up from $83.8 million in 2000. These escalating trade deficits with China have far-reaching effects, particularly on American workers. This article will examine the impact of free trade with China as documented in two of the annual reports submitted to Congress by the bi-partisan, 12 member U. S.-China Economic and Security Review Commission (USCC).

The 2007 report included a case study of the local impact of trade with China on North Carolina. The USCC report stated:

The accelerating decline in North Carolina's manufacturing employment is due in large measure to increasing competition from imports mostly from China... The combination of China's 2001 admission to the World Trade Organization (WTO), which gave it quota-free access to U.S. markets for its textile and clothing exports, and the subsequent U.S. grant of Most-Favored (Trading) Nation status that lowered most tariffs on Chinese imports, battered North Carolina's textile and apparel industries, and they never recovered.

During the period of 2001-2007, the number and proportion of jobs in the North Carolina services sector increased. This shift put downward pressure on wages because manufacturing historically paid substantially higher wages than the services sector. The shift also reduced the number of workers receiving such fringe benefits as retirement and health insurance, in part because some of the displaced workers were able to find only part-time jobs that often do not offer benefits.

Because a greater proportion of North Carolina's workforce had manufacturing jobs than any other state, North Carolina's workforce was more vulnerable to competition from imports than the workforces of other states. North Carolina's manufacturing economy was made even more vulnerable by its concentration in the import-sensitive sectors of textiles, apparel, and furniture. According to the National Council of Textile Organizations, the U. S. textile industry dropped from the worlds second in basic manufacturing industries in 1991 with $244 billion in sales, down to third in 2002 with $60 billion in sales. North Carolina is one of the southeast states that had a large number of textile companies.

The North Carolina Employment Security Commission's Labor Market Information Division followed the employment prospects of 4,820 workers laid off from bankrupt Pillowtex in 2003, which was the largest mass layoff in North Carolina history. "About 40 percent of the laid-off workers had not yet found work, three years after they lost their jobs, and for those who have, take-home pay isn't as much as they were making at Pillowtex." The article reported that North Carolina has been the most impacted state in the nation by layoffs due to trade. Between 2004 and 2006, almost 39,000 North Carolina workers were certified by the Trade Adjustment Assistance program as having lost jobs to trade, more than 10 percent of the U.S. total of 387,755."

According to the Social Science Research Institute (SSRI) of Duke University in North Carolina, there were 2,153 textile and apparel plants in North Carolina employing 233,715 people in 1996. By 2006, the apparel industry had experienced a 70% decline in jobs and 55% loss of plants. The textile industry by comparison had only lost 63% of jobs and 32% of plants from 1996 to 2006.

"Trade agreements can profoundly affect state and regional economies and particular industries. While trade agreements that lower import barriers among America's trading partners have the potential to benefit American exporters, North Carolina appears to have realized few if any substantial benefits from China's admission to the WTO, and the net effect of trade with China since its accession appears to be negative overall for North Carolina's economy." It isn't just people losing jobs and not being able to find other employment that pays as well as their former jobs, "hundreds of small towns throughout North Carolina impacted by plant closures are dying."

How does the downturn in the textile industry in the South affect other regions of the country? San Diego is a long way from North Carolina so you wouldn't expect there would be much impact. However, the San Diego region has a large number of companies manufacturing sporting vehicles, such as dune buggies, go-karts, mini-motorcycles, etc. The connection is that the Southeast has traditionally been the largest market for go-karts, and the majority of U.S. textile companies were located in the Southeast. A San Diego company that has manufactured parts for go-karts for over 40 years revealed that their sales of go-kart parts had dropped significantly in the past ten years in the Southeast. Go-karting is mainly a hobby of blue-collar workers, such as textile workers. Many of the thousands of workers who lost their jobs in the textile and apparel industry were not able to find equally well-paying jobs in other manufacturing sectors. The average weekly salary for a U.S. textile worker was $487 in 2002, 38 percent more than the average salary of $301 for a worker in a retail store, such as Wal-Mart. When a family's disposable income drops drastically, money for non-essentials, such as go-karts is cut or goes away altogether.

The loss of these well-paid manufacturing jobs in North Carolina's textile industry may have resulted in families losing their homes and/or being forced to relocate to other areas of the country to find jobs. Taking lower paying jobs in their own communities may have resulted in families no longer being in the middle class income range. And, those who haven't been able to find any work or only part-time work may have even dropped down to the poverty level.

What about all the jobs that were supposed to be created in the green and clean technology industries? Is our free trade agreement with China as part of the World Trade Organization having an effect on these industries also? This is of particular concern because the Obama Administration has repeatedly emphasized green technology's role in job creation and highlighted green technology in its 2010 National Export Initiative, which is intended to double the level of U.S. exports within five years. According to the U.S. Department of Commerce, the green sector has the potential to fuel economic growth in the immediate future. More than two dozen states have also identified green technology's potential to create jobs and to revitalize manufacturing areas that have been damaged by imports, outsourcing, and the loss of export markets abroad.

The USCC's 2010 Annual Report to Congress discussed China's green energy policies and efforts to promote alternative energy sectors as part of its analysis of the U.S.-China relationship in several areas.

One key development in 2009 was a ban in China on deployment of turbines of less than 1,000 kilowatts for most projects, on the grounds of inefficiencies. The ban had a discriminatory effect on imported turbines, since most of the smaller models are produced by European and American companies. Larger wind turbines are more expensive and require substantial new investment to build but require comparatively less maintenance and can be more efficient, because they require fewer installations. But the larger wind turbines require new investment by manufacturers. Many foundries in the United States, for example, are reluctant to invest in new, larger molds for the larger turbine casings unless they can be guaranteed a substantial production run. Chinese state-owned foundries are under no such profit constraints.

"U.S. firms are losing global market share in the green technology sector, mostly to China, with solar panel manufacturing experiencing a particularly severe loss. As various sources have noted, China became the largest producer of solar panels in the world in 2008, shipping 2,600 megawatts of photovoltaic panels, enough for about one-third of annual world supply."

U.S. and Chinese firms are both engaged in active research and development for electric vehicles and their fuel cells or batteries. To spur the entry of electric vehicles into the market, China has created a mandate for increased vehicle emissions standards in the next ten years, with plans to reduce gasoline consumption by vehicles 60 percent by 2020. This is expected to spur the development of an electric vehicle market.

Recent reports have noted that China is considering a new technology transfer requirement for foreign automakers. China's Ministry of Industry and Information Technology is ''preparing a 10-year plan aimed at turning China into 'the world's leader' in developing and producing battery-powered cars and hybrids,'' according to executives at four foreign car producers familiar with the plan.

In the area of alternative energy, China is following a familiar pattern of choosing an industry sector and showering it with a comprehensive mixture of subsidies and incentives. In this case, China also intends to establish certain alternative energy industries as ''national champions'' able to dominate world export markets. China has already developed the world's largest manufacturing capacity in solar panels. Its capacity is far larger than that needed to satisfy domestic demand; 90 percent of the solar panels manufactured in China are exported. China also has a large number of installed wind turbines and is rapidly developing new technology for a growing global market. China's domestic wind turbine industry operates behind a protectionist barrier. Only the largest wind turbines may be installed in China. This excludes many U.S. and European turbines, which are typically smaller.

What have been the long term effects of the loss of manufacturing jobs on America's working class? On July 25, 2011, the Pew Research Center released a report based on their analysis of new census data, which shows that the wealth gaps between whites and minorities have grown to their widest levels in a quarter-century. I believe that this is the direct result of the loss of manufacturing jobs in the last decade, exacerbated by the loss of jobs in the construction industry since 2007 with the burst of the real estate bubble.

The numbers are based on the Census Bureau's Survey of Income and Program Participation, which sampled more than 36,000 households on wealth from September-December 2009. Census first began publishing wealth data from this survey, broken down by race and ethnicity, in 1984.

Household wealth is the sum of assets (houses, cars, bank accounts, stocks and mutual funds, retirement accounts, etc.) minus the sum of debt (mortgages, auto loans, credit card debt, etc.). It is different from household income, which measures the annual inflow of wages, interest, profits and other sources of earning. Wealth gaps between whites, blacks and Hispanics have always been much greater than income gaps.

The median wealth of white U.S. households in 2009 was $113,149, compared with $6,325 for Hispanics and $5,677 for blacks, according to the analysis released Tuesday by the Pew Research Center. Those ratios, roughly 20 to 1 for blacks and 18 to 1 for Hispanics, far exceed the low mark of 7 to 1 for both groups reached in 1995, when the nation's economic expansion lifted many low-income groups to the middle class. The white-black wealth gap is also the widest since the census began tracking such data in 1984, when the ratio was roughly 12 to 1.

According to the Pew study, the housing boom of the early to mid-2000s boosted the wealth of Hispanics in particular, who were disproportionately employed in the thriving construction industry. "After reaching a median wealth of $18,359 in 2005, the wealth of Hispanics ...declined by 66 percent by 2009... Among blacks, who now have the highest unemployment rate at 16.2 percent, their household wealth fell 53 percent from $12,124 to $5,677."

"Typically in recessions, minorities suffer from being last hired and first fired. They are likely to lose jobs more rapidly at the beginning of the recession, and are far slower to gain jobs as the economy recovers," said Harrison, who is now a sociologist at Howard University. "One suspects that blacks who lost jobs in the recession, or who have tried to help family members or relatives who did, have now spent whatever savings or other cashable assets they had."

Asians lost their top ranking to whites in median household wealth, dropping from $168,103 in 2005 to $78,066 in 2009. Like Hispanics, many Asians were concentrated in states like California hit hard by the housing downturn. More recent arrivals of new Asian immigrants, who tend to be poor, also pushed down their median wealth.

In San Diego, the factory floor is comprised primarily of Asians, Vietnamese, Cambodian, Laotian, and Hmong, many of whose families came to the United States as refugees, with little formal education. The balance of manufacturing workers is mainly Hispanics, with a small percentage of whites and blacks. In other parts of the country, this mix of factory workers may comprise a higher number of working class whites and blacks who were able to get jobs in manufacturing with only a high school diploma or GED.

For the past 60 years, the manufacturing sector offered the best opportunity for persons with only a high school diploma or GED to have upward mobility -- starting at an entry level wage, but having the opportunity to advance to better paying jobs through experience, training, and education. With millions of manufacturing jobs gone, the opportunity to live the American dream is disappearing. As a nation, we are in danger of becoming a two-class society of rich and poor, haves and have-nots, with the rapidly disappearing middle class. We must stop this slide into becoming a third-world country. It's time for us to review our unilateral free trade agreement with China that only seems to benefit China at the cost of jobs and even whole industries in the United States.