This article by Scott Lincicome does an excellent job of dispelling the myth that “elites” sold out the working class in America by freeing up trade with China. Here he summarizes the implications of this research:
Based on the above, one can divine a simpler, far-more-benign explanation for the last 20-plus years of U.S. policy: Washington elites saw little choice but to liberalize trade with China because the available alternatives were non-existent or worse, especially given the information at the time that this “choice” was being made. Liberalization, moreover, produced real benefits (including for American workers and the poor), while also removing gross historical inequities in the previous, more protectionist system (though I doubt many elites really cared about that). The resulting disruption and adjustment was hard for some regions and workers (certainly not for all)—harder than many elites expected—and certainly post-liberalization policy mistakes were made (though often in the direction of less liberalization, not more).
The article also pushes back against the popular view that the US is an innocent free trading nation surrounded by devious mercantilist countries.
On trade, the United States still maintains significant tariffs and tariff-rate quotas on imports of “sensitive” products like trucks, apparel, footwear and food. According to the group Global Trade Alert, moreover, the United States has also long been one of the most frequent users of “harmful” non-tariff government trade interventions—ones that far outnumber its “liberalizing” measures over the same period. This includes hundreds of special duties (“trade remedies” like anti-dumping and anti-subsidy measures) on all sorts of Chinese imports, most often using a special “non-market economy” anti-dumping methodology that practically ensures sky-high duty rates (often more than 100 percent) on those goods—coincidentally, one of those “WTO-plus” accession commitments special to China and a few other economies. These duties are specifically intended to offset “unfair” trade and subsidies that injure US manufacturers and workers, and—as the numbers indicate—American companies and labor unions have been quite successful in petitioning for them. Dozens of other Chinese imports are barred from the U.S. market as a result of “Section 337” actions that target intellectual property rights violations. Chinese investment, meanwhile, can be (and has been) restricted by the Committee on Foreign Investment in the United States (CFIUS), and US technology exports to China are often blocked on national security grounds.
And let’s not forget about the auto bailouts, the steel industry bailouts, the alternative energy subsidies, the manufacturing tax credits, the ExIm Bank loans, procurement preferences like Buy American and Davis-Bacon, the Jones Act and the PVSA, and the billions of other taxpayer dollars that the United States has doled out to “blue collar” industries and workers over the last few decades at the federal level alone.
Look for the article to have little impact, unfortunately, as most people have already made up their minds.
Off topic: Paul Krugman recently linked to a Wharton study by Alexander Arnon looking at the correlation between oil prices and business investment, which has now become strongly positive. This is a point I made in an Econlog post a few months ago—I’m glad to see a much more serious study confirming this hypothesis. (My discussion is near the end of the linked blog post.)
HT: David Beckworth
READER COMMENTS
Benjamin Cole
Jan 21 2019 at 9:32pm
“Washington elites saw little choice but to liberalize trade with China because the available alternatives were non-existent or worse, especially given the information at the time that this “choice” was being made.”
Well, at least Scott Lincicome concedes it is elites that make US foreign, trade and military policy. Lincicome might have achieved a tighter fit had he substituted the word “multinationals” for “elites.”
“Look for the (Lincicome) article to have little impact, unfortunately, as most people have already made up their minds.” —Scott Sumner
As for informed, open-minded debate on “free trade,” I see rigid PC-ism on all sides. Anyone who evens ponder the results of “free trade” is labeled a Neanderthal Luddite nativist, who never even read David Ricardo.
America’s macroeconomists have so sacralized “free trade” theory that it has become really a free-trade theology.
So what are the results off large and chronic US current account trade deficits?
The IMF says such large an chronic trade deficits lead heavy capital inflows and then to bloated asset values, and then Hyman Minsky moments. In 2008 that meant a collapse of the US financial system which was heavily exposed to the asset real estate.
Maybe the IMF is wrong—but why is this topic never aired?
Then the US Federal Reserve has published papers that large current account trade deficits are associated with sharply higher domestic house prices.
Of course, that means lower living standards. Also, not a topic to be aired.
Finally, EconPol has published a study that the Trump tariffs are basically being “eaten” by China manufacturers—-which makes sense as China operates a dirigiste, mercantilist authoritarian state (one that is getting worse daily). The price signal is less important in such a regime than holding onto global market shares, and in maintaining income from exports and domestic stability.
Sure, let’s talk about international trade.
BTW, Lincicome is a very smart guy—and a lawyer for multinationals.
Add the “h: to activate links.
ttp://www.imf.org/en/Publications/ESR/Issues/2018/07/19/2018-external-sector-report
ttps://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr541.pdf
ttp://www.econpol.eu/sites/default/files/2018-11/EconPol_Policy_Brief_11_Zoller_Felbermayr_Tariffs.pdf
Thaomas
Jan 22 2019 at 11:40am
The failure of economic policy with regard to the globalization generally and the China Shock specifically was to have allowed fiscal policy to create large fiscal = trade deficits. The US should have been supplying more of the capital for the world’s economic growth which would have led to faster growth in the US and, incidentally to less decline in US manufacturing employment.
pyroseed13
Jan 22 2019 at 12:11pm
I thought Lincincome’s was a useful summary of literature but he still seems to downplay the effects of the China shock on the overall labor market. He points to studies that show benefits for consumers, which I don’t think anyone disputes, although the magnitudes of some of these effects are not very large. And many of the papers he cites find very clear distributional effects if your read the abstracts, but he doesn’t discuss much of this in his analysis. Where I think a lot economists were mistaken is with the assumption that many of those who lost their jobs would find better jobs and that the transition would involve only short-term pain. But we know now that the adjustment process took several years and that many of these new jobs did not pay as well as the old ones. This is one of the points that Autor’s emphasizes in his talks but it is missing from Lincinome’s analysis.
Scott Sumner
Jan 22 2019 at 2:40pm
pyroseed, I’m not sure your criticism is entirely fair. He does say:
“The resulting disruption and adjustment was hard for some regions and workers (certainly not for all)—harder than many elites expected”
But he also points out that workers as a group gained, which is a point ignored by many opponents of globalization.
Many critics rely on the Autor, Dorn and Hanson study, which I’ve criticized in other posts (and Krugman has also criticized on similar grounds.)
An addition, many critics of China trade seem reluctant to criticize technological progress, even though it was the latter that was responsible for the vast majority of job losses in steel, coal and many other industries.
pyroseed13
Jan 22 2019 at 3:00pm
“But he also points out that workers as a group gained, which is a point ignored by many opponents of globalization.”
Absolutely! But I am not sure a policy that inflicts a tremendous amount of pain on a non-trivial number of workers so that other workers can experience a small gain is really optimal. I should note that I am not nor would I have been against opening trade with China but I would have done it in a more responsible way.
“Many critics rely on the Autor, Dorn and Hanson study, which I’ve criticized in other posts (and Krugman has also criticized on similar grounds.)”
Well it’s not just one study. See Pierce and Schott for instance. And I believe there are other papers which use different measurements and achieve similar results.
“An addition, many critics of China trade seem reluctant to criticize technological progress, even though it was the latter that was responsible for the vast majority of job losses in steel, coal and many other industries.”
Well I don’t dispute that automation can be disruptive, but usually new technology takes awhile to diffuse throughout the economy. It’s unlikely that automation alone would lead to such a “swift and sudden” decline in manufacturing employment, to echo Pierce and Schott. In fact, this is why I have hard time accepting other explanations. What other shock occurred around 2001, other than a brief recession, that would lead to manufacturing to decline so rapidly and then never recover?
Jon Murphy
Jan 22 2019 at 3:43pm
That’s going to depend on how you define “optimal.”
As an aside, the numbers of workers affected by the China Shock is incredibly small; it’s less than the number of workers who lose jobs every month due to regular job churn. What you want to call “trivial” will depend on personal preference, but I am just pointing it out for context.
pyroseed13
Jan 22 2019 at 5:23pm
Yes, but “normal job churn” typically does not result in the labor market and neighborhood effects that Autor has documented.
Jon Murphy
Jan 22 2019 at 6:57pm
It doesn’t? Ok, I’ll be sure to tell Lowell, Framingham, Lawrence, and all the other former textile towns in MA that when their jobs went to the South that there were no neighborhood effects. I’ll be sure to tell all the tourist towns on Cape Cod who shutter entirely in the winter when the tourists leave that there are no neighborhood effects. I’ll be sure to tell the gentrifying neighborhoods of DC that as the area gets wealthier and poor jobs are replaced with higher paying jobs that there are no neighborhood effects
Mark Z
Jan 23 2019 at 12:38am
One of the main reasons for unusually prolonged unemployment in depressed parts of the country is the unprecedented of dependency on the state or working relatives. The number of working age people on disability, medicaid, and other pre-retirement entitlements has exploded in the past few decades. If more people are being paid more than ever not to work, then fewer people are going to be willing to work for less than their last job. Having to work for less than one’s last job isn’t a new phenomenon; what’s new is that, almost for the first time in history, many people who just lost jobs can actually afford to say ‘no’ to whatever jobs are being offered.
Another issue is compositional changes via migration: if employment opportunities are expanding in state A and declining in state B, people will tend to move from state B to state A, especially those with the requisite skills to find employment in the expanding sectors of state A. This growth in state A can lead to a rise in unemployment rate in state B without actually leaving any individual in state B worse off. Some of the decline in the midwest and Appalachia as measured by aggregate statistics obscures that many people in these areas are in fact finding jobs – just not in those states. And that’s fine. It’s not a problem that some industries wane and others rise, and that employment by industry will tend to correlate with geography. Public policy should care about the welfare of individuals, not averages of geographic entities.
Finally, it’s hard to sympathize much with the manufacturing sector and its employment woes in states like Michigan, since unions and sympathetic politicians and regulators have been driving wages up well above the market wage in the global economy. I’m not wholly convinced it’s not Alabama and states with more manufacturing-friendly environments that are “causing” much of the unemployment problem in the midwest, and I’m also not convinced Alabama hasn’t earned those manufacturing jobs more than Michigan.
pyroseed13
Jan 23 2019 at 12:09pm
Jon, I don’t consider the examples you’ve cited to be “normal job churn.” What I had in mind was something along the lines of that you have a business, another competitor moves in, the business closes, and the workers get reallocated. Obviously moving an entire supply chain from the North to South, to choose one of your examples, would be quite disruptive!
Mark, good analysis. I think your comments about unionization are largely correct. One other reason, in general, in the so-called “good old days” manufacturing paid such a premium was that many minorities were excluded from employment. So in some sense, wages were actually “too high” back then. I should stipulate though that I don’t actually consider unionization to be a bad thing, through many of the laws governing it are badly in need of reform.
Scott Sumner
Jan 23 2019 at 4:33pm
For individual workers, all job losses are sudden. There was a problem of job loss in the rust belt in the early 1980s, for instance, which had nothing to do with China.
In addition, even if we had opened trade with China at a slower rate, most of those jobs would have gone to other developing countries. Change will always be painful for a certain fraction of workers and owners.
Comments are closed.