David R. Henderson  

Americans, on Average, Gain Big from Trade with China

Why I Think I Win My Bets... Goldberg on McCloskey and Spen...

Update below

The rise in exports from China has been one of the most significant events in international trade in recent decades. This trend has accelerated since that country's entry into the World Trade Organization (WTO) in 2001. Even before that date, by a vote of the U.S. Congress China received the low-tariff, most-favored-nation status associated with WTO membership each year. But with WTO membership, Chinese firms experienced a reduction in the uncertainty associated with the outcome of that vote. This contributed importantly to the surge in exports to the United States, according to studies by Justin Pierce and Peter Schott and by Kyle Handley and Nuno Limão; their hypothesis is supported by empirical work by Ling Feng, Zhiyuan Li, and Deborah Swenson. Pierce and Schott observe that the surge in Chinese exports to the United States coincides with a substantial decline in U.S. manufacturing employment. Handley and Limão find that the welfare gain for consumers due to this increase in Chinese imports is of the same order of magnitude as the U.S. gain from new imports in the preceding decade. These initial findings highlight the dual role that Chinese imports play for the United States: on the one hand, they create import competition with associated labor-market dislocation; on the other, they benefit U.S. consumers.

The first of these roles is explored in a series of papers by David Autor, David Dorn, and Gordon Hanson. They analyze the impact of Chinese import competition between 1990 and 2007 on local U.S. labor markets, exploiting geographic differences in import exposure that are due to initial differences in industry specialization. Higher exposure increases unemployment, lowers labor force participation, and reduces wages. [See Figure 1] At the aggregate level, a conservative estimate is that the import surge accounts for one-quarter of the decline in U.S. manufacturing employment. The regional concentration in the decline in manufacturing employment is inconsistent with some alternative explanations of this phenomenon, notably the possibility of a systemic technology shock. The trade effects on unemployment are confirmed by examining worker-level evidence. Most recently, in joint work with Daron Acemoglu and Brendan Price, these authors find that the import surge from China also contributed to unusually slow employment growth in the United States following the global financial crisis and the Great Recession. (italics added)

This is from Robert C. Fenestra, "The International Trade and Investment Program," NBER Reporter, 2016, Number 1.

There was a lot of discussion in the blogosphere a couple of months ago about some work by Autor, Dorn, ad Hanson, referenced above, that found long-term reductions in employment and real wages in U.S. industries facing the most competition from Chinese imports. Some bloggers were writing as if they believed that this upset the traditional economist's case for free trade. See this piece by Noah Smith for an example of that reaction. In my view, it did not. Yes, I was a little surprised at the long-term reduction in U.S. employment, but no, I was not surprised at the reduction in real wages. When firms face new competition, their profits tend to fall; when workers face new competition, their real wages tend to fall.

But the case for free trade never rested on the idea that no one is hurt by it. The moral case is one that few economists make, although many might believe it. Economist Don Boudreaux makes the case very well: it is that people should be free to trade with whom they wish and that, just as governments have no right to prevent person A from peacefully trading with person B who lives across the street, governments have no right to prevent person A from peacefully trading with person B who lives across the ocean. As I write this, I see that he makes the moral case in a post today, although not in quite those words.

The economists' case for free trade is typically that the gains to the gainers from free trade in a particular country exceed, usually substantially, the losses to the losers in that same country. You can find that case made nicely in graphs in, for example, Greg Mankiw's Principles of Economics textbooks. Moreover, say most economists, even though the introduction of free trade in a particular good will hurt a group of people employed in producing that good domestically, a general free trade will help virtually everyone on net. So the people producing furniture will lose from free trade on furniture, but will gain from free trade on coffee, bananas, oil, textiles, cars, etc. On net most of the "losers" will be winners.

Feenstra continues:

While these papers have explored the impact of import competition from China, they do not incorporate the consumer gains or the export opportunities created by expanded Chinese exports. The first attempt to put the surge in Chinese exports into a general equilibrium context is that of Lorenzo Caliendo, Maximiliano Dvorkin, and Fernando Parro. Their computable general equilibrium model incorporates labor mobility frictions and dislocation costs. They find that growing Chinese import competition resulted in a 0.6 percentage point reduction in manufacturing's share of total employment, or approximately one million jobs lost, which is about 60 percent of the change in manufacturing employment not explained by a secular trend. At the same time, the China shock increased U.S. welfare by 0.2 percent in the short run and 6.7 percent in the long run, with very heterogeneous effects across labor markets. Despite the fact that employment impacts and labor market dislocation are much stronger in some areas, the consumer gains and export opportunities mean that nearly all regions experience net benefits from rising Chinese imports.

As Don Boudreaux reminds us in the comment below, co-blogger Scott Sumner had an excellent post on the Autor et al article. In my haste to get to a Friday night event, I left this out, as I did the excellent Russ Roberts Econtalk interview of Autor. Boudreaux's comment is well worth reading.

Comments and Sharing

CATEGORIES: International Trade

COMMENTS (3 to date)
Don Boudreaux writes:

David: Thanks for the pointer to Feenstra's paper.

Here's one elaboration on the point you make - and that Scott made in an earlier post - about the Autor, Dorn, & Hanson paper on American trade with China. Specifically, I'm led to offer this elaboration by your admission that you're "a little surprised at the long-term reduction in U.S. employment." (Note that what I say here is not meant to suggest that such surprise is inappropriate or, well, surprising. I share that surprise. And I agree with all that you write above.)

All predictions, even those that Hayek called "pattern predictions," of course rest on ceteris paribus assumptions. When an economist predicts that increased imports will have no long-run effect on the number of jobs (or rate of unemployment) in the domestic economy, the empirical prediction that the data will reveal this theoretical prediction to be correct rests on countless assumptions about policies, preferences, physical constraints, even culture, remaining sufficiently unchanged so as not to prevent the creation of a large-enough number of new employment opportunities in the long-run to offset the jobs 'destroyed' by the increased imports. So stated, the above seems to be trivially true.

Yet over the course of the 17-year period studied by Autor, et al., ceteris was not paribus. It never is, of course. But when Russ, in his podcast with Autor, asked Autor about government-program changes that made being unemployed a bit easier - and, hence, perhaps explains much, or all, of Autor, et al.'s findings - Autor dismissed this possibility. Autor chose to conclude from the data that the cause of the increase in long-term joblessness that he and his co-authors found was Americans' increased trade with China.

Perhaps Autor's conclusion is correct, but note that not only is it not one that is 'proven' by the data, it demands some supplemental theoretical account to make it work. The very nature of the economists' case for free trade - namely that free trade is simply one manifestation of economic competition, and that economic competition causes no lasting unemployment because the economy is assumed to be sufficiently robust to 'create' enough jobs to replace those that are 'destroyed - demands that an observation that long-term unemployment increased following a change in trade patterns be explained by some account of a change in the economy or in government policy (and not just by a change in the intensity of trade).

Because international trade is just one particular manifestation of economic competition - and because economic competition incessantly changes the patterns of economic activity - why in the years 1990-2007 do we suddenly get an economy that apparently cannot create employment opportunities, in response to changes in trading patterns, as well as it did in the 200-plus years earlier? And why focus on increased trade with China? The 1990-2007 period was famously one of great technological change - change that itself 'destroyed' many jobs and that altered the manner in which people are able to earn livings. Is it really possible, empirically, to determine that the increased long-term unemployment is only of American workers who were competing with Chinese imports rather than also of American workers who lost jobs to new technologies - or, even, to changing demographics within the United States?

Pointing out, as Autor did, that the workers affected by increased trade with China were generally low-skilled and poorly educated is insufficient to conclude that the economists' case for free trade now no longer holds. The 19th and 20th centuries were filled with many workers just as unskilled and as ill-equipped for 'new' jobs as were the years 1990-2007.

So, the surprising long-term unemployment that occurred in the U.S. just as American trade with China intensified cannot be explained simply by pointing to this increased trade with China (and then concluding that the standard economics of trade no longer applies). Its explanation demands some account of changes in the economy or policy that, for the first time in American history, make the economy unable to create, and to create in 'good' time, a sufficiently large number of new employment opportunities to replace those that are 'destroyed' by foreign trade.

The surprise about unemployment, in short, must be due, not to increased foreign trade, but to some underlying change in the economy. And this change, whatever it might be (call it "X"), means not only that we should now start to fear increased competition from imports but also fear any changes in production technologies and in the pattern of consumer expenditures. The reason is that these changes, too, will interact with X to create undesirable, long-lasting unemployment.

I'm not yet ready to conclude that the U.S. economy has changed in this way, although I might well be mistaken. But if U.S. economy has indeed changed in this unfortunate way, the problem is not trade per se - and protecting ourselves from long-term unemployment will involve a great deal more than higher tariffs on imports.

ThaomasH writes:

"Pointing out, as Autor did, that the workers affected by increased trade with China were generally low-skilled and poorly educated is insufficient to conclude that the economists' case for free trade now no longer holds."

I agree and as far as I know, Autor or no other economist has changed his opinion that freer trade is desirable or that the opening of trade with China was on balance a mistake. I do sense that there is a belief that the net gains are smaller and that the costs to low income workers is greater than had previously been thought. And this change of opinion is probably linked to the decline in political support for freer trade.

David R. Henderson writes:

as far as I know, Autor or no other economist has changed his opinion that freer trade is desirable or that the opening of trade with China was on balance a mistake.
Then I suggest that you check the link to Noah Smith. He comes very close to saying just that.

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