Real China Shock: A Lesson in Comparative Advantage for NC

by Roy Allen Howell

The August 11th cover of the Wall Street Journal told a grim tale of how the furniture industry that once dominated Hickory, NC had been overwhelmed by competitive imports following China's accession to the World Trade Organization. But, narratives like these dismiss stories of economic dynamism and, well, the free market working as it should.

From the August 11 article by Bob Davis and Jon Hilsenrath:

Hickory, a quiet city of about 40,000 people, used to have a smell redolent of wood lacquer. It was a boomtown in the late 1990s. Foreign competition challenged the local apparel industry, but furniture thrived.

Furniture makers figured they were relatively safe from imports because their products were bulky, expensive to ship and often involved hand-craftsmanship. Then shipping costs fell, and many Americans chose low prices above all else.

 

Thirteen years after Chinese accession to the WTO in 2001, the article's authors go on to say, manufacturing employment in Catawba County had shrunk by 50 percent, half of which had been in the furniture industry. No doubt, it is not a pretty picture they try to paint.

Perhaps the most striking figure cited is that 73.5 percent of all furniture purchased in the U.S. today is imported. Despite what the authors would lead you to believe (drawing a highly questionable correlation between Chinese competition, political polarization, and the rise of Trump), furniture imports are actually good news by and large for Americans and are evidence of the free market's invisible hand at work. Put in perhaps oversimplified terms, when the market is left to function as it should (i.e. eliminating tariff barriers), producers in one country who are able to make goods at lower cost than those in another will inevitably sell those goods to consumers in the country over which it has a cost advantage (compared to an alternative specialization) at a lower price than if the good had been made in that country. Applying this to the furniture industry, China generally has a comparative advantage over the U.S. in manufacturing furniture. This is to the benefit of American consumers, however, who can now use these savings in any number of ways that will improve their quality of life.

While Davis and Hinsenrath seem to lament the fact that "Americans chose low prices above all else" (fans of impractical "Buy American" campaigns one can only assume), the article does point to two North Carolina companies that did adapt to Chinese imports and remain competitive. As the article states:

Century and Bernhardt survived by focusing their U.S. production on made-to-order goods, especially upholstered furniture.

 

These companies shifted factors of production toward a market in which they could maintain some advantage. And, the remarkable thing about the free market: market forces will also lead to competitive industries in which the U.S. has a comparative advantage (e.g. technology and services) replacing those defunct ones in places like Hickory. 

Davis and Hilsenrath attempt to tell a story of how the plight of some American workers related to Chinese competition has created a political climate ripe for xenophobia and protectionism by delivering yet another isolated narrative that is sure to only further fuel that political climate. But, for North Carolina, a state that has the highest employment numbers related to inward Chinese direct investment, stories like these don't even begin to tell the whole truth about trade.

In response to the Journal article and as an example of some of the things It left out, Cato Institute adjunct scholar and Duke University lecturer Scott Lincicome had this to say on Twitter:

(*The rest of his criticism addressing worker displacement is worth a read as well.)

The truth is that when it comes to U.S.-China trade, the free market is at work, largely to the benefit of both countries. Continued misinformation about trade with China, whether it be trade deficits, job loss, dumping, or regional trade agreements, creates not only an anti-China sentiment but also an anti-trade sentiment, to the detriment of American trade policy and consequently to the detriment of the vast majority of Americans. 

 

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