Scott Sumner  

China trade has been a boon to the US, China, and the world.

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The Great Californian Bag Surp... The Most I'll Admit...

Here's Ryan Avent:

ECONOMISTS are realising that they have got some things about trade wrong in the past. Just because trade can make everyone better off, doesn't mean it will, for instance (at least without some help from politicians). That new research, and this year's political ructions, are generating some reflection on these issues among economists is a good thing. But it is important to maintain one's perspective. Tim Duy has not done that, I think, in this stemwinder of a post on the effects of American trade policy. He quotes Noah Smith, who says:
[I]n the 1990s and 2000s, the U.S opened its markets to Chinese goods, first with Most Favored Nation trading status, and then by supporting China's accession to the WTO. The resulting competition from cheap Chinese goods contributed to vast inequality in the United States, reversing many of the employment gains of the 1990s and holding down U.S. wages. But this sacrifice on the part of 90% of the American populace enabled China to lift its enormous population out of abject poverty and become a middle-income country.
And then writes:
Was this "fair" trade? I think not. Let me suggest this narrative: Sometime during the Clinton Administration, it was decided that an economically strong China was good for both the globe and the U.S. Fair enough. To enable that outcome, U.S. policy deliberately sacrificed manufacturing workers on the theory that a.) the marginal global benefit from the job gain to a Chinese worker exceeded the marginal global cost from a lost US manufacturing job, b.) the U.S. was shifting toward a service sector economy anyway and needed to reposition its workforce accordingly and c.) the transition costs of shifting workers across sectors in the U.S. were minimal.
Before closing:
I don't know how to fix this either. But I don't absolve the policy community from their role in this disaster. I think you can easily tell a story that this was one big policy experiment gone terribly wrong.
I think Mr Duy is getting the story wrong in a few important ways.
I'm not too happy with the way Ryan frames the issue. The first sentence seems to imply that economists didn't understand the second sentence of his post. But virtually every EC101 textbook published in the past 50 years tells students that trade benefits the US overall, but that specific groups in import-competing industries are hurt by trade. That's not a new insight. Otherwise I think Avent's post is excellent, and well worth reading. My only other quibble is that I think the Smith/Duy posts are much weaker than even Ryan suggests, for reasons I'll discuss below:

1. Much of the recent discussion, including posts by Noah Smith, are based on a misinterpretation of research by Autor, Card and Hanson, which I discussed in multiple posts. Autor, et al, provide cross-sectional evidence that areas of the US that were most affected by competition from China did relatively poorly. Many people (including, at times, the authors) misinterpreted that finding as suggesting that the overall impact on the US was negative. But you cannot draw macroeconomic conclusions from a cross-sectional study. They showed that areas most impacted by China trade did relatively poorly (a finding I accept) but their study told us nothing about the macroeconomic impact. It would be like trying to draw macro conclusions about fiscal multipliers by looking at state level multiplier effects. Monetary offset anyone?

2. At times, Autor seems to suggest that China trade might have hurt the US by boosting our trade deficit. First, it's not clear that China trade does boost our trade deficit (which is based on saving and investment flows), but let's suppose it did. What then? Here it might be worth comparing the US to the Eurozone, which has a massive current account surplus, far larger than China's surplus. I did so in this post, and found that Europe has experienced almost exactly the same sort of decline in manufacturing jobs as the US. So trade deficits don't seem to be the culprit.

3. But it's even worse. Their study looked at data from 1990-2007, when the US was not at the zero bound. Paul Krugman pointed out that monetary offset would have been expected to apply during this period, and thus that the Fed would, as a first approximation, expand monetary policy enough to offset any job losses from falling AD due to trade deficits.

Just to be clear, I'm not saying China trade might not have produced some net job loss---one can tell stories where workers losing jobs in manufacturing aren't able to find jobs in the service sector because of a lack of skills, and hence the natural rate of unemployment rises. But the natural rate has not risen. A better story is that somehow China has contributed to workers simply exiting the labor force, and not even looking for jobs. Maybe, but as we'll see, China is probably not the right target, even if that theory is true.

4. I wonder why there is so much focus on China. It's true that about 20% of our imports come from China, but about 80% come from other areas. About 20% of our imports come from Europe, and a much higher figure from NAFTA (Canada plus Mexico). Are Chinese exports particularly toxic? The best argument in favor of that proposition is that Chinese exports were unusually fast growing, and thus unusually disruptive. I agree. But there are many other arguments that cut in exactly the opposite direction:

a. The goods we buy from Europe and NAFTA tend to be goods that we would otherwise produce at home, like cars and other sophisticated manufactured goods. In contrast, the goods we buy from China are often goods that would otherwise have been bought from other countries in East Asia, and elsewhere. This is not always true, but it's certainly true on average. When China opened up to the world, lots of production shifted from the so-called Asian "Tiger economies" to Mainland China. There is no way that industries like clothing, shoes and toys were going to stay in America. If we did not buy these goods from China, we could have bought them from other Asian countries. Today that's probably even true of more sophisticated goods like laptop computers and iPhones.

b. Also keep in mind that China is often simply an intermediary. The important components might be made in Korea or Taiwan, and then sent to China for assembly. The data may show massive growth in imports from China, but the actual value added in China may be much less than the official growth figures. But then how to explain the rapid growth in trade?

c. China's entry into the world economy occurred just as technology like container ships was dramatically reducing the cost of trade, and boosting trade as a share of global GDP. Some of the fast growth in Chinese exports over the past few decades would have instead come from other East Asian countries, or even Mexico, if China has stayed a closed economy. In other words, correlation does not prove causation. How much was trade liberalization, and how much was cheaper trade costs?

d. China's exports to America were rising very fast even before the trade reforms such as WTO, which Tim Duy refers to. I'm not disputing that the reforms boosted trade further. But only a portion of the effects found by Autor, et al can be attributed to the WTO, a big part is simply the fact that China had a huge comparative advantage in lots of industries, and the cost of trade was falling fast.

Now lets suppose that all of the preceding arguments made above, and also by Krugman are wrong. And not just a little bit wrong, but 100% wrong. Just how bad might China trade actually be? What's the worst case?

Start with the fact that we imported $466 billion from China in 2015, about 2.5% of GDP. I'm not going to argue that 2.5% of GDP is a small number, it's not. But can that possibly be all cost? Wouldn't you want to at a minimum look at our exports to China (I view that as a cost, BTW, but mercantilists often see it as a benefit)?

More importantly what about all the goods we get from China? Walmart and Target stores are a cornucopia overflowing with Chinese goods, which provide great benefits to Americans living on modest incomes. Surely that counts for something, indeed quite a lot. I'd say it means the US is a net gainer from trade, but let's say I'm wrong. And let's continue to assume that all of my preceding arguments are utterly without any merit. You are still left with 2.5% of GDP, minus any benefits you attribute to exports to China, minus the undeniably vast benefit to consumers from access to Chinese goods. That's is, 2.5% of GDP minus a number that is almost certainly quite large.

Now contrast that with the rhetoric in the Smith and Duy quotes. Smith refers to a sacrifice by 90% of Americans. Where does this number come from? Well over 80% of Americans are in the service sector. Many others are in construction or export industries. When coal miners or policemen or fireman or teachers or construction workers or Boeing employees or nurses or cashiers go shopping at Walmart, and load up on Chinese goods, precisely how are these groups being devastated by China? I don't get it. Smith seems to be assuming that everything that has gone wrong in America since 1990 is due to China. OK, that's hyperbole, but isn't the 90% figure he cites equally exaggerated?

In other posts I've pointed out that in industries like steel and coal the vast majority of job loss is due to technology, not trade. And of the modest part of job loss that is due to trade, only a modest part of that is due to trade with China (particularly if you keep your eye on value added, and China's role in a global supply chain that often starts in other East Asian countries.)

And I'd say the same about Tim Duy's remarks. I believe the China trade is a good thing. The China growth story since 1980 is literally the best thing that has ever happened on the last 4.6 billion years on planet Earth, and China's opening up to foreign trade is an important part of that story, albeit far from the whole story. (It might be helpful here to think of the worst thing that has ever happened, and then imagine its exact opposite.) The cost to America would have to be mind-bogglingly large in order for this not to have been a wise policy, even if our role in China's growth were modest (which it was.). I share the view of most economists that the US has actually benefited from China trade. But even if there had been a small net loss, how could it possible be set against the obviously vast benefits to extremely poor Chinese from global trade?

Ryan Avent's post is well worth reading, but if anything I believe he understates how far off base Smith and Duy are in this case. To summarize:

1. The problem isn't trade, it's automation.
2. If trade is a small part of the problem, it's not China: it's the other 80% of exporters.
3. If China imports are a tiny part of the problem it mostly reflects deeper changes in East Asian supply chains, and nothing specific about China.
4. And only a small part of that tiny part of the problem is the WTO, a lot of it is cheaper shipping costs and China's powerful comparative advantage in many industries.
5. Chinese goods are a huge boon to low income Americans.
6. If trade really did boost inequality, the way to fix that is with redistribution and/or weaker IP laws, not protectionism.
7. The argument for protectionism is exactly the same as the argument for Ludditism. It hurts society overall, but helps certain groups hard hit by change. Is that what we want? Do policies that make America poorer also make America great again?

I got into blogging in 2009 because I was upset about how monetary policy errors were devastating working class Americans. I'd be really upset if I thought the China complaints were true. But no one (including Autor, et al) has given me a scintilla of evidence for the sweeping claims being made.

PS. There are many more arguments to be made. Those struggling coal towns in West Virginia would be hurt by protectionism against China. Those struggling lumber areas of Oregon (Duy's home state) would also be hurt, as we export both coal and lumber to China. The more you drill down into the details, the weaker the argument against trade becomes. Construction in the US would be hurt as well, as I>S by exactly the amount of our current account deficit.

PPS. EU exports to the US are slightly below China's, but if you add in exports from Switzerland, and other non-EU countries, then Europe's exports would be about the same as China's.




COMMENTS (22 to date)
David R. Henderson writes:

Scott,
Wonderful post.
One correction:
You write,
The problem isn't trade, it's automation.
That’s not a problem. Or, if it is, then automatic dishwashers are a problem, as are ATMs.

Hazel Meade writes:

Very good post.
I think one aspect that might bother people is that the worker whose job might be automated or outsourced to China isn't in control and doesn't benefit from that transaction. This sounds obvious, but when we think about the benefits of trade and specialization we often frame them in microeconomic terms - it's better for me if I pay you to make widgets because you can do it more efficiently and I can focus on something I'm better at. But the "I" and the "you" in reality are groups of disconnected people. The person making the decision to buy stuff from China and the person formerly making the stuff themselves are two different people, the person whose work is now superfluous doesn't gain from the trade in the way that is implied by the micro-economic framing. To put it another way, if I outsourced my own job to China, I would directly benefit from trade, but that's not what happens. I don't get to outsource my own job to China, someone else does, and there's nothing I can do about it. Someone else gets the gains from trade, even though it's my job that's being done more efficiently.

So I think it's possible to make a case that there should be some form of compensation paid to workers that get laid off as a result of trade or automation, so that they actually see the benefit of the efficiency gain directly. If I thought that my job would be automated tomorrow, it wouldn't bother me if I collected the profits myself.

Bruce K. Britton writes:

Important but not mentioned is the great importance of how you count the 'gains' from trade. If we add up the savings to consumers we get a very large number. If we add up the losses borne by those in import competing industries, we also get a large number but not so large as the total savings by consumers. This looks like the gains are larger than the losses.

The problem with this calculation, demonstrated in the recent election, is that the losers are likely to vote on the basis of their loss. and they are joined by others who live in the same area who see the losses, and they each get one vote. On the other hand, consumers who get the savings are not likely to vote on that basis, because their individual gains from trade are likely to be small, although they add up to a lot because there are so many of them. Hence the candidate who appeals to the losers from trade will get extra votes: Trump.

I can suggest other ways of calculating if you are interested.

Thaomas writes:

I have nothing against compensation to workers directly affected by increasing imports, but it's much more important to aim for strong, inclusive growth. We have failed to invest in infrastructure and to maintain strong ngdp growth. Eliminating a few regulations with negative c/b effect would have helped, too.

Jim Glass writes:

"I think one aspect that might bother people is that the worker whose job might be automated or outsourced to China isn't in control and doesn't benefit from that transaction..."

Yes, exactly the same as with all those in the buggy and animal-powered-machinery-&-vehicles sector which, all glibness aside, was huge in its day-- who lost their jobs to the new businesses using internal combustion engines. And it did bother people then. There were political movements to protest and block the spread of auto usage.

"So I think it's possible to make a case that there should be some form of compensation paid to workers that get laid off as a result of trade or automation.."

That case has been continually made forever, for 30+ years that I personally remember, and long before that.

Because this very same argument has been going on since the start of the Industrial Revolution. In my personal memory "our jobs" have been being taken by, in different election cycles, the Germans, Japanese, Chinese, Mexicans, Chinese again... The word "Luddite" reportedly dates back to circa 1811.

Before the Industrial Revolution, from just-earlier Britain and across Europe all the way back to ancient Rome, labor saving devices often were explicitly illegal exactly because they displaced current job holders (no matter the scope of the innovation's benefits). That was one way to deal with the problem. Trying to block free trade is a modern attempt at the same.

Jim Glass writes:

"The problem with this calculation, demonstrated in the recent election, is that the losers are likely to vote on the basis of their loss ... On the other hand, consumers who get the savings are not likely to vote on that basis ... Hence the candidate who appeals to the losers from trade will get extra votes: Trump."

The merits of the argument about trade aside for a moment, its electoral importance as an issue that supposedly turned the election may be greatly exaggerated.

Trump drew a smaller percentage of eligible voters than did either McCain or Romney, losers both -- Trump 27.2% versus 28.1% and 27.4%.

There's no evidence of any politically powerful anti-trade populist surge in that. Trump didn't get *any* extra votes compared to the other two losing guys.

Trump didn't win the election. Hillary lost it, as millions of Democrats who voted for Obama twice decided not to vote for her. (And it wasn't because so many Obama-ites suddenly became protectionists.)

mbka writes:
EU exports to the US are slightly below China's, but if you add in exports from Switzerland, and other non-EU countries, then Europe's exports would be about the same as China's.

Sadly, Trump has started to attack the EU like any other nation that dares trading with the US, with a pretty hefty salva fired at Germany this week. I await anxiously the battering of Switzerland for bankrupting the US watch industry.

In the broader context: If "we" reasonable people using conventional, well established economics, want to make a political impact on the freight train of doom that is approaching, we need two things:
- posts such as yours to set the record straight on what is actually happening. Especially in face of politicised academics who publish alternative reality papers to suit the current winds
- cutesy, tweetable propaganda taking the high road, establishing a positive narrative for the values of neoliberalism, and demolishing the trumpian narrative of doom using his own methods.

I am very worried right now that we only have one of the above. Rationality is on our side, but not emotion and opinion.

Scott Sumner writes:

Thanks David.

Hazel, It's often difficult to tell whether a job has been lost to automation, trade, or some other factor.

Bruce, I see no evidence that Trump's success came from losers from trade. The vast majority of Trump voters were winners from trade, like coal miners in West Virginia.

mbka, Good points, but I strongly believe that rationality will win out in the long run.

shecky writes:

Compensation for the losers of trade and automation has been done in one way or another for a pretty long time. Conservatives/libertarians generally hate these programs. I've been quite surprised by how many not-liberals recently seem to be scratching their chins and opining "Gee, maybe all this free trade stuff can really give folks a beating sometimes." Perhaps the Trump presidency may be the surprising boon to liberal politics in the end, an era where conservatives/libertarians warm up to the idea of welfare programs.

George writes:

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Don Boudreaux writes:

Excellent and important post, Scott. Here's my elaboration.

Hazel Meade writes:

@Jim Glass,

True, and I'm absolutely a proponent of free trade and technological advancement. I just wish there was some way for workers who are doing these jobs to directly benefit from the gains in the way that the microeconomic framework implies. If I automate my own job, that's a gain to me because I'm still getting paid and collecting the profit. But in an employer/employee framework, the employee just gets laid off - there is no way for him to benefit directly from the efficiency gain. Perhaps trade liberalization and automation would proceed more rapidly if we paid off the workers who were harmed, or if the employment model included more profit sharing. If the employee can retire onto a pension or get a share of the profits instead of simply being out of work, they won't be the primary losers - they'll be winners.

Hazel Meade writes:

@Scott Sumner

Also true. I think maybe if workers had more of a stake in the business, such as greater profit sharing or compensation in the form of stock options, this sort of thing might shake out automatically. For example, in an employee-owned cooperative, where everyone got a share of the profits, they could theoretically just outsource the entire coop to China and then write each employee a check for their share of the profits and then everyone would take second jobs and effectively end up with a pay raise. On the other hand, if the jobs were being lost due to changes in the market, the business would just become unprofitable. No intervention necessary.

Jarrod writes:

Fantastic post, thanks for writing!

Robert writes:

I think it is relatively easy to believe that jobs are moving to China, since outsourcing and finding cheaper labor has been a major initiative from business leaders for the time period provided. It would be odd that business leaders do something for their benefit, and the employees not becoming resentful about the business leaders' clear intention.

I think that foreign trade in theory could be detrimental in the same ways that anti-trust legislation seek to address. The skills are non-transferable and the skills, equipment, and infrastructure atrophy over time.

I think that there may be other factors that are affecting the middle class, where foreign trade gets the bulk of the blame. For example, in Rochester N.Y. the major industries no longer exist, Kodak & Xerox, the new major employer is the hospital, and there have not been new major companies to replace the giants. This is probably a result of policy decisions in Albany and Washington than due to trade with China. Who is going to communicate those effects to the people impacted?

Lastly, it is not clear to me that the current anti-trade and protectionism is not a negotiation tactic in order to reduce barriers to trade in other countries. If China lowered its barriers to trade and tariffs, wouldn't the new administration claim that a major win and be a benefit for everyone including the Chinese. It seems like a blind spot for someone to talk about the benefits of a market economy without acknowledging the amount and tactics of negotiation that is intrinsic in the making the markets work.

On the other hand, can you imagine how poorly off the middle class would be without the deflationary pressures of technology and international trade. Why is deflation a bad thing (well, except for those who have borrowed large amounts of money and do not want to pay the original value they borrowed. I know, I know that deflation can be horrible when banks cancel revolving lines of credit, such during the financial crisis, which lead to my father losing everything.) Oh, he provided parts to Carrier who moved production from Syracuse to China.

Michael Rulle writes:

Its certainly hard to disagree with the thrust of this post---i.e., growth combined with trade is a large net positive for the world. I guess you assume this has become mildly controversial because of Trump noise---which may be valid as a backdrop for the reason for writing this article to begin with.

Your focus on China makes sense also. I am surprised you wrote that "maybe trade with China did cause some net job loss". I find that interesting. I do not believe that is likely to have been true (unless you mean on a relative but not absolute basis on the margin). But you later say Trade is not the problem (I presume in general) but automation is!

I realize you took back that point at David's suggestion. But it is interesting that this has become a very common meme in the last several years, so much so that even you reflexively highlighted the point. The effects of increased productivity (trade and automation) has to be a net positive, even if in the short run there are dislocations.

While there may be some volatility between who is "winning" or "losing" at any point in time, my guess is that the overwhelming percentage of people "win" over time from automation and trade. I wonder if the cross sectional studies show such conditions changing through time for actual specific individuals versus categories of individuals.

Finally, the reason there is such a great focus on China regarding this whole issue---a point you seemed to question-- is for geopolitical reasons. We are watching a power rise in the east and the nature of man (or at least historical man) is to be concerned about power shifts.

Carl writes:

Can you elaborate on your suggestion that we should have "weaker IP laws"? Which ones would you weaken to create more jobs?

pyroseed13 writes:

As I and others have pointed out tirelessly before, the "automation story" of large employment declines in the manufacturing industry is simply not tenable. If you look at the graph of manufacturing employment, the decline occurred swiftly after 2000 (some of this was due to the recession at that time) and continued to fall and never recovered. If it was just automation, shouldn't the declined have been consistent over time? Indeed, there was a lot of technological advancement in 2000s, but most of this was in computers. When you remove that industry from manufacturing, productivity has been mostly flat. There is no other obvious explanation for such a large decline in manufacturing other than trade with China.

Matthew Waters writes:

pyroseed,

Manufacturing employment was flat starting in the late-60's. The population and workforce had grown considerably during this time. As a share of workers, manufacturing employment declined considerably before China.

In addition to the effect of China, the size of the American workforce stagnated in the 2000's. So now any gains in productivity eventually meant less workers rather than constant workers and higher production.

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