Americans, on Average, Gain Big from Trade with China
By David Henderson
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.
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.