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