August 31, 2016 | Commentary on Trade
“The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade,” a scholarly paper that examines the impact of U.S. trade with China, has made quite a splash in policy circles. Media outlets hail it as “influential,” “famous,” “excellent,” and “a real bombshell.” And the Paulson Institute’s Damien Ma is right when says that “‘China Shock’ has driven a lot of the trade debate in this [election] cycle.”
The paper spotlights the alleged negative effects of trade with China. But are its findings accurate? Given the stakes of this year’s election — and the centrality of debates over free trade — that question is especially relevant. As it turns out, “China Shock” doesn’t prove that trade with China has made Americans worse off, nor make a compelling case for locking American workers and their offspring into low-wage manufacturing jobs in perpetuity.
If we compare “China Shock’s” central claims with undisputed facts from other sources, we can see that trade with China is, on the contrary, a net plus for Americans.
China Shock claim: “Views on how trade affects wages and employment turned less sanguine in the 1990s. As wage inequality rose, low-skill wages and employment fell, and manufacturing employment contracted in the U.S., globalization was seen initially as a prime suspect.”
The facts: Low-income U.S. households have been getting richer. In the 1990s, according to the Congressional Budget Office, real income increased by 17.9 percent for the lowest quintile of U.S. households. By 2013 real household income for the lowest quintile was 30.3 percent higher than in 1990.
China Shock claim: “At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize.”
The facts: Offsetting employment gains have definitely materialized. From 1991 to 2007, the period analyzed in “China Shock,” the economy added 29 million net new jobs — an employment increase of 27 percent.
China Shock claim: “China's rise has provided a rare opportunity for studying the impact of a large trade shock on labor markets in developed economies.”
The facts: The sharp rise in imports from China was accompanied by a big drop in the share of imports coming from other Pacific Rim countries. In 1991, 40 percent of U.S. imports came from Pacific Rim countries, including China. In 2007, just 35 percent of U.S. imports came from the Pacific Rim. Not much of a shock there.
China Shock claim: “In trade theory, it is standard to assume that trade is balanced.”
The facts: When all financial transactions with China are accounted for, trade is balanced. If a U.S. family spends $100 on shoes made in China and those dollars are used to invest in U.S. companies or to buy government treasury bonds, the result is reportedly a $100 trade imbalance. But Americans still benefit, and U.S.-China financial flows balance.
China Shock claim: “Suppose that policy distortions in China — such as the excess absorption of credit by state-owned enterprises — induce the country to run a trade surplus and the U.S. to run a trade deficit.”
The facts: Suppose that policy distortions in the United States induce the U.S. to run a trade deficit. From 1991 to 2007 the U.S. government ran cumulative budget deficits totaling $2.4 trillion. These deficits were partially financed by investment from China. Hundreds of billions of dollars from China were used to purchase “exports” of U.S. treasury bonds instead of privately produced goods and services.
This was an entirely predictable result of deficit spending by the U.S. government. As the Congressional Budget Office (CBO) explained at the time: “[Trade] deficits are not caused by either U.S. or foreign trade policies. Rather, they are determined by the balances between saving and investment in the United States and in other countries and the effects of those balances on international flows of capital.”
China Shock claim: “When looking within manufacturing, Tennessee, owing largely to its concentration of furniture producers, is far more exposed to trade with China than is Alabama, which has agglomerations of relatively insulated heavy industry…. [Regions] that were more exposed to increased import competition from China experienced substantially larger reductions in manufacturing employment.”
The facts: Tennessee displays no sign of being harmed by imports from China. During the period measured in “China Shock,” the state’s real manufacturing GDP increased 77 percent — even more than the concurrent 65 percent increase in Alabama. Looking at the big picture, total real GDP increased even more in Tennessee (131 percent) than in Alabama (110 percent) or in the U.S. as a whole (123 percent).
Although both states lost manufacturing and farm jobs as workers and farmers became increasingly productive, overall employment increased. Job growth was higher in Tennessee (34 percent) than in Alabama (27 percent).
China Shock claim: “Applying the direct plus the indirect input-output measure of exposure increases estimates of trade-induced job losses for 1999 to 2011 to 985 thousand workers in manufacturing, and to 2.0 million workers in the entire economy.”
The facts: Did trade with China result in any net job loss in the U.S.? No. From 1999 to 2011, the U.S. economy added over 3 million net new jobs.
Trade destroys some jobs and creates others, just as technology does. As economist Scott Sumner put it: “why focus on jobs lost by the China shock, but not German exports or robots replacing workers?”
Money saved buying a made-in-China product is money that can be spent or invested in other parts of the economy, creating U.S. jobs. Moreover, the Chinese can use the money they earn from exports to import U.S.-made products or invest in the U.S. economy, also creating U.S. jobs. According to Nobel economist Paul Krugman, this process “should be seen as jobs shifted out of manufacturing to other sectors, not total job loss.”
China Shock claim: “It is incumbent on the literature to more convincingly estimate the gains from trade, such that the case for free trade is not based on the sway of theory alone, but on a foundation of evidence that illuminates who gains, who loses, by how much, and under what conditions.”
The facts: “China Shock” attempts to illuminate the impact of trade on those who lose, but it also obscures the impact of trade on those who gain. Since China joined the WTO, the United States undoubtedly lost some low-wage, low-skill jobs. But that’s not the whole story. Since that time:
· Real U.S. GDP has increased by 27 percent
· Real U.S. manufacturing GDP has increased by 23 percent
· Real income for the lowest quintile of U.S. households has increased by 12 percent
· Employment has increased by 10 percent
The facts suggest not that trade with China costs jobs but that we need a more dynamic and growing economy so that Americans who lose their jobs — for whatever reason — have ample opportunities to find new work and continue their pursuit of the American Dream.
First appeared on Real Clear Policy.