The Debate

Bush Gave China Permanent Normal Trade Relations Status With the US 15 Years Ago. What Did That Change?

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The Debate

Bush Gave China Permanent Normal Trade Relations Status With the US 15 Years Ago. What Did That Change?

Was the decision to grant PNTR to China a catastrophe or a driver of mutual prosperity?

Bush Gave China Permanent Normal Trade Relations Status With the US 15 Years Ago. What Did That Change?
Credit: White House photo by Eric Draper

Monday marked the fifteenth anniversary of U.S. President George W. Bush’s 2001 decision to sign a proclamation granting China permanent normal trading relations (PNTR) with the United States.  At the time, the White House described the proclamation as the “final step in normalizing U.S.-China trade relations and welcoming China into a global, rules-based trading system.” The administration had pushed the U.S legislators on the issue, with the House of Representatives approving the measure 237 to 197 first in May 2000, followed by the Senate’s assent 83 to 15 in September 2000.

U.S.-China trade volume in goods and services stood at roughly $660 billion in 2015 and the country is the United States’ largest trading partner. The U.S. Department of Commerce estimated that trade with China supported roughly 251,000 U.S. jobs. In 2015, the United States saw a $366 billion trade deficit with China, representing a 6.6 percent increase from the previous year. (The United States has a modest but notable surplus in services trade with China; this stood at $30 billion in 2015.)

The establishment of PNTR enabled this growth in trade, but not everyone today is happy about the way bilateral trade with China has turned out for the United States. In fact, in a normal year, observing the 15th anniversary of PNTR with China may have been too mundane to even merit mention.

However, in 2016, with the election of Donald J. Trump to the U.S. presidency after a campaign that aggressively chastised China for everything from unfair trade practices to artificial devaluation of the renminbi to make Chinese exports more competitive — the Chinese central bank has instead been attempting the opposite, to prop up the renminbi to stem capital flight — recalling the effects of PNTR is timely.

Moves by the incoming administration during these weeks of presidential transition have made it clear that the rhetoric of the Trump campaign on trade with China can be expected to inform policy. In particular, Trump’s announcement last week that Peter Navarro, a professor of economics at the University of California at Irvine and producer of the documentary Death By China, will head a new National Trade Council suggests friction in U.S.-China trade.

Navarro’s views on China are public and well-known on the issue of trade. He counts U.S. support for China’s entry into the World Trade Organization, followed by the granting of PNTR in 2001, as two of the worst mistakes the United States could have made. In an op-ed earlier this year in the San Francisco Chronicle, Navarro recounts that “In 2000, lame-duck President Clinton and a Republican Congress worked hand-in-glove to grant China permanent normal trade relations status.”

“This paved the way for China’s 2001 entry into the WTO — arguable the most destructive trade event in U.S. history,” he adds. The hyperbolic Navarro thesis on PNTR roughly amounts to the idea that the status allowed Beijing to substantially drive up a trade imbalance with the United States by flooding American consumers with cheap goods, forcing U.S. firms to respond by lowering costs that included lay-offs and substituting workers with automated solutions.

The reality of how PNTR with China precisely interacted with U.S. labor market outcomes is complex. Data from the U.S. Bureau of Labor Statistics bears out the fact that U.S. manufacturing employment fell dramatically during the 2001 recession, accelerating trends that had been well underway since the late-1970s. PNTR and trade liberalization may not have significantly driven this decline — at least not in 2001.

Criticism of PNTR with China, however, has been a mainstay in U.S. politics for some time. Indeed, the Bush administration’s decision to grant China PNTR found nowhere near consensus levels of support. Since 2001, there have been multiple calls to repeal PNTR with China, with the initiative gaining considerable support from critics on the political left as well as the right. (Navarro and Trump aside, Bernie Sanders, a strong contender in the 2016 Democratic primary, once described PNTR as “not a good deal fro American workers” and led a bipartisan effort for China PNTR repeal in 2005.)

The political salience of PNTR isn’t restricted to the legislative realm. A group of economists, days after the results of the November 2016 U.S. election became known, demonstrated convincing evidence in a non-peer-reviewed research note (PDF) that important swing states that with a high degree of Chinese import penetration “would have elected the Democrat (Hillary Clinton) instead of the Republican candidate (Donald Trump) …  if, ceteris paribus, the growth in Chinese import penetration had been 50 percent lower than the actual growth during the period of analysis.” (Others have made this observation, suggesting that PNTR with China “helped create” Trump.)

Meanwhile, Justin R. Pierce of the Fed and Peter K. Schott of the Yale School of Management argued earlier this year in a NBER working paper (PDF) that U.S. manufacturing employment was 29.6 percent lower it should have been had PNTR not been granted to China in 2001. The explanation provided by the two economists for the discrepancy is largely due to the certainty provided by the PNTR proclamation, which clarified that eliminated tariffs on Chinese goods would not return.

Whatever the final verdict on China PNTR’s costs and benefits for the U.S. economy at large (which includes both consumers, who may well have benefited from lower prices on several goods, and laborers, who may have suffered from competition), the Bush administration’s decision mattered deeply. In a broader geopolitical sense, the quadrupling in U.S.-China trade volumes since the early 2000s may be read by some as lessening the chance of protracted great power conflict between the two countries (though scholarly consensus stands divided on that count too).

15 years after the PNTR decision on China, we have a U.S. president-elect who is deeply skeptical of the benefits of trade with China. Beijing, for its part, has been caught off-guard by Trump’s post-election rhetoric on China and trade. Chinese Foreign Ministry spokesperson Hua Chunying expressed China’s hope that “the American side will join us in maintaining the sound and steady growth of the bilateral relationship, economic relations and trade included, as it is in the interests of the two peoples, as well as world development and prosperity.”

Given all we have to go on from Trump and his transition team, it doesn’t look too likely that the incoming U.S. administration will be willing to continue business as usual.