When China joined the WTO, it kick-started the Chinese economy and roused a giant.

Bill Clinton’s Last Great Victory Is the Reason Hillary Gets Hammered on Trade Today

Bill Clinton’s Last Great Victory Is the Reason Hillary Gets Hammered on Trade Today

How the past two decades will shape the future.
Sept. 28 2016 12:00 PM

Waking the Sleeping Dragon

Why does Donald Trump hammer Hillary Clinton on trade? In part, because of Bill Clinton’s last great legislative victory.

Shipping containers sit stacked at Port of Dalian on September 10, 2013 in Dalian of Liaoning Province, China.

Photo illustration by Slate. Photos by Feng Li/Getty Images and Timothy A. Clary/Getty Images.

On May 24, 2000, Bill Clinton clinched what many believed would be the last great legislative victory of his presidency. That afternoon, the House of Representatives voted to award China permanent normal trade relations, effectively backing Beijing’s long-in-the-making bid to join the World Trade Organization. The historic deal had been Clinton’s top priority in the waning days of his last term—a move he hoped would improve relations with the world’s most populous nation, while cementing his own legacy of using free trade to advance America’s foreign policy interests. It had been opposed by labor unions wary of competition from poorly paid foreign workers and championed by corporations salivating over 1.3 billion potential Chinese customers (the business lobby had spent millions on TV ads supporting the pact). In the end, after much wrangling, 73 Democrats joined 164 Republicans to pass the agreement, which was expected to glide through the Senate.

may 24 bug.

“This is a good day for America,” Clinton said afterward. “In 10 years from now we will look back on this day and be glad we did this. We will see that we have given ourselves a chance to build the kind of future we want.”

Advertisement

Things have not worked out quite as the 42nd president hoped. Normalizing trade with China set our rival on a path to becoming the industrial powerhouse the world knows today, decimating American factory towns in the process and upending old assumptions about how trade effects the economy. Thanks to a growing body of academic research, we’re only just now beginning to understand the extent of the economic fallout, as well as the degree to which it has helped poison our politics. If you want to understand why Donald Trump’s furious message about trade resonates with so much of the public, and has helped him come within striking distance of defeating Hillary Clinton and taking the White House, you have to start with another Clinton’s choice at the end of his term. 

Jordan Weissmann Jordan Weissmann

Jordan Weissmann is Slate’s senior business and economics correspondent.

Clinton’s reasons for embracing trade with China had as much to do with geopolitics as economics. By the late 1990s, the People’s Republic was a fast-growing but relatively cloistered economy dominated by a government whose human rights record could be summed up with the words Tiananmen Square. But after years of false starts, its leadership had become determined to join the WTO, the club of nations that sets the ground rules for international trade. This was no small commitment—gaining membership would require China to strike individual deals with the group’s 135 members to ease tariffs and open itself to foreign companies. In part, that meant giving its own citizens more leeway to run businesses.

Embracing those sorts of economic liberties, Clinton argued, might one day lead the Communist Party to allow more political liberties as well. “By joining the WTO, China is not simply agreeing to import more of our products; it is agreeing to import one of democracy’s most cherished values: economic freedom,” the president said in a March 2000 speech.

Former Ambassador Charlene Barshefsky, who served as the U.S. trade representative under Clinton and helped negotiate China’s deal with the U.S., explained to me that given China’s size, its involvement on the world stage was “an almost foregone conclusion.” With that in mind, what mattered was how it would happen: “Would it go in a direction antithetical to Western norms? Or could it be encouraged to go in a direction that was compatible to Western norms?”

Advertisement

In 1999, the White House hashed out its agreement with Beijing. China would drop tariffs and other trade barriers tripping up U.S. farmers and companies. In return, the U.S. would support China’s WTO application, phase out some quotas that limited Chinese textile imports, and (most importantly) give it permanent most favored nation trade status. What, exactly did that mean? China had enjoyed the same low tariffs on its exports to the U.S. as most other countries since 1979. But, under an old Cold War–era law, the president and Congress were essentially required to renew those trade rights each year, a bit of political theater that often involved airing all sorts of grievances about China’s rights record. (They were nevertheless renewed each time, without fail.) Making trade relations permanent eliminated that thorny annual ritual—in short, it would take Beijing off probation.

Most experts did not see this as a particularly large concession, since nothing, as far as they could tell, would fundamentally change about the U.S. and China’s trade relationship. Paul Krugman, who was pro-normalization, and would go on to win a Nobel Prize in economics for his work on trade, spoke for many when he called it “an issue whose symbolic importance is much larger than its direct economic implications.” Clinton, for his part, argued the U.S. was essentially getting something for nothing. “Economically, this agreement is the equivalent of a one-way street,” he said in March 2000. “It requires China to open its markets—with a fifth of the world’s population, potentially the biggest markets in the world—to both our products and services in unprecedented new ways. All we do is to agree to maintain the present access which China enjoys.”

Supporters of the deal didn’t just tout its benefits for Americans. They also argued that voting against it would handicap U.S. businesses in the future. China technically only needed support from two-thirds of the WTO’s members, even if it was expected to strike bargains with all of them, so it would join the group regardless of Washington’s qualms. And if Congress refused to grant China trade permanent status, Beijing would be allowed to continue shutting out American companies even as it opened its market to their foreign competition. “If Congress votes yes, the United States will benefit. If it votes no, only its economic competitors will benefit,” wrote the Washington Post’s editorial board, in support of normalization.

It’s striking, in retrospect, just how small supporters of normalization seemed to think the economic stakes of the deal really were. The U.S. International Trade Commission, for instance, produced an analysis suggesting that if Beijing joined the WTO, the U.S. economy would grow by just $1.7 billion. Gary Hufbauer and Daniel Rosen of the Peterson Institute for International Economics suggested that, with permanent normal trade relations, U.S. exports to China would enjoy a one-time jump of $5.4 billion. Without it? They’d pop up $2.4 billion. The difference to the U.S. economy would be like an extra rock or two tossed into Lake Michigan.

Advertisement

Labor unions and their allies thought otherwise. Already angry over the North American Free Trade Agreement, which had drawn some manufacturing production into Mexico, they argued that a deal with China would send more factory work overseas. Some of their predictions seemed apocalyptic. The Economic Policy Institute’s Robert Scott suggested that our roughly $70 billion deficit with China might double or more in 10 years, costing the U.S. some 817,000 jobs. (Hufbauer and Rosen called those calculations “an absurd extrapolation.”)

In hindsight, the fears weren’t absurd at all. In the months immediately after Congress voted to normalize trade with China, dozens of U.S. corporations announced that they were moving manufacturing overseas. And once China officially joined in the WTO in 2001, the country rapidly began transforming into an export behemoth as foreign investment and factory work flooded into the country—its surplus with United States alone rose from $83 billion in 2001 to more than $295 billion in 2011. During the same 10-year period, U.S. manufacturing employment, which had stayed essentially steady in the years after NAFTA, declined from about 17.1 million to 11.8 million. Manufacturing had been withering as a share of America’s labor market for many, many years. But the shockingly fast collapse of the early 2000s simply convulsed blue-collar communities.

Were all 5 million of those job losses due to trade with China? Not at all—many likely disappeared as machines replaced human labor in factories. Did American manufacturing vanish altogether? Nope—output actually reached all-time highs before the Great Recession. But starting in 2013, economists David Autor, David Dorn, and Gordon Hanson, along with other collaborators, began publishing a series of papers showing that manufacturing employment had declined significantly more in parts of the United States where local businesses faced stiff competition from Chinese imports, compared with places where industry was less exposed. Between 1999 and 2011, the authors estimated, about 985,000 American manufacturing jobs were wiped away by China’s export boom. Adding in the restaurants, movie theaters, and other businesses that wilted as plants shuttered, the researchers estimated that the “China shock,” as they dubbed it, cost the U.S. some 2 million to 2.4 million jobs—spread from the Rust Belt to the South to the far corners of New England.

Much of this flew in the face of conventional economics. The textbook line on free trade was that while it created winners and losers, the effects were supposed to show up in people’s paychecks, not in raw jobs numbers. For a country like the U.S., trading with a country like China or Mexico should push down wages a bit for less educated workers as factory work moved away, and increase wages for more educated workers, whose salaries would stretch a little further thanks to inexpensive cars, TVs, and T-shirts. People who lost work, it was assumed, would generally adjust by moving—either into a new industry, or a new town with better prospects.

Advertisement

How had the economists, and the administration, gotten it so wrong? The most popular answer among politicians is currency manipulation. China pegged the yuan to the dollar after massively devaluing it in the mid-1990s, then didn’t let it begin to rise in value until after 2005, once its boom had taken off. Keeping the redback cheap simultaneously boosted Chinese exports, by making them more affordable to buyers abroad, and discouraged imports, by making them more expensive to Chinese consumers. 

But most economists think currency manipulation is, at best, only a partial explanation for China’s export explosion. Another answer is that joining the WTO forced the country to reform its economic rules in ways that made its manufacturing sector exponentially more competitive, which quickly unleashed the power of its massive, low-wage labor force. As Autor, Hanson, and Dorn have noted, Beijing shut down turgid state-owned manufacturers, allowing private businesses to take their place. It permitted companies to start exporting directly instead of working through state-owned intermediaries—according to one study, that change alone might have made a 30 percent difference in its exports. By lowering tariffs, the government also made it easier for companies to import the materials they needed to manufacture their goods. In other words, China had more room to grow than anybody imagined, because of how stunted its economy had started out.

“I don’t think people were stupid. I was one of those people,” Hanson told me, when I asked why he thought so many economists had underestimated China. “We didn’t realize how distorted China’s economy was.”

Clinton’s decision to normalize trade relations and welcome China into the WTO may have been like a key in the ignition, encouraging Beijing to become more competitive. But researchers are starting to think it had an important psychological effect on American business executives, too. Justin Pierce of the Federal Reserve Board and Peter Schott at Yale suggest that granting Beijing permanent trade status gave companies the confidence that they could send production offshore, or just start buying goods from Chinese suppliers, without having to worry that Washington might one day impose large tariffs. In other words, it instantly made moving your TV plant to Shenzhen less of a risky bet. In support of this argument, they show that after 2000, American employment generally dropped fastest in the manufacturing industries where tariffs on Chinese goods would have shot up the most had Congress suddenly revoked the country’s trading rights. The more the threat of tariffs faded, the more jobs disappeared.

Advertisement

And it turns out that people and communities don’t instantly adjust when their livelihoods are upended, the way they do in textbooks. Autor, Dorn, Hanson, et al. found that, when factory jobs disappeared, nothing showed up to replace them. Rather than moving to places with more opportunities, workers tended to stick around their hollowed-out hometowns—after all, uprooting your life for the sake of work isn’t that easy for people without much in the way of resources.

It’s hard to say exactly what the U.S. should have done differently. What would have happened if Congress had rebuffed Clinton and refused to normalize relations? Maybe Beijing’s leaders would have soldiered on and joined the WTO anyway, as many predicted. Or maybe injured national pride would have empowered China’s own anti-globalization hard-liners and kept it from acceding or embracing market reforms as ardently as they did—in which case, there’s a chance hundreds of millions of Chinese workers would be poorer today, because their country still hadn’t opened up to the world. It’s also possible that the U.S. trade deficit would have grown even if China hadn’t turned into such a manufacturing force, in part because the dollar’s status as the world’s reserve currency keeps its value high, and because, as a nation, we don’t save a lot (which the rules of economics say should lead to a trade deficit). If China had never risen, maybe we’d be angrier today about factories fleeing to Mexico or Vietnam.

It’s also possible that most Americans have benefited from Chinese trade in the end, thanks to lower consumer prices. Would you even have an iPhone right now without China’s low-cost supply chain? Unfortunately, people feel such benefits less acutely than the very concentrated losses in communities where the local economy has been shredded by trade.

The deep pain those cities and towns have experienced is one of the powerful forces that have transformed American politics into a form of tribal warfare over the past decade. Exhibit A is, of course, Donald Trump. It’s a mistake to try to pin the Republican nominee’s rise on any single factor, whether xenophobia, racism, or economic anxiety. But it’s no accident that a candidate who barks about the evils of trade and the need to get tough on China has won the adoration of white working-class men who have watched their hometowns bleed jobs thanks, at least in part, to globalization. Earlier this year, the Wall Street Journal found that during the Republican primary, Trump won 89 of the 100 counties that were most exposed to trade with China.

But the political impact of Chinese imports has been wider than just Trump. Academic researchers have found that districts that lose jobs due to trade are more likely to turn against incumbents. Between 2002 and 2010, districts that faced Chinese import competition became far less likely to elect moderate Democrats and far more likely to elect extremely conservative Republicans, including Tea Party members.

Whether or not embracing trade with China was the correct economic decision for the wider country, the people in power simply weren’t prepared to help the communities that would suffer the bargain. Their best guesses about the economic impact of normalization bore little relation to what was in store, and little was done for those who got the short end of the bargain, even after it became clear that all was not proceeding as Clinton had hoped. It’s become fashionable to say that America needs to do a better job assisting globalization’s losers so we can all enjoy its benefits. We don’t know how to do that yet, and for a lot of Americans it’s too late. Many of them are placing their hopes in Donald Trump—and even if he loses, the rage and disappointment he’s capitalized on will remain.