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Scott Sumner offers an interesting response to the recent David Autor, David Dorn, and Gordon Hanson paper on the China trade shock, which show some areas exposed to this new competition never recovered:
First, even if China trade was bad for the US, it was almost certainly extremely good for China, which was a vastly poorer country in 1990. So I’m quite confident that economists are justified in supporting free trade. Whether they are justified in suggesting that Chinese trade is beneficial to the US is another question.
Second, this is just one study, and as we’ll see it’s far from convincing. We don’t abandon views held for 200 years, and supported by hundreds of studies, just because of a single study. I can’t speak for other economists, but I very much doubt whether economists are holding back some sort of “secret” information that free trade is actually bad.
[Third,] the ADH paper does show a nice job of showing that Chinese exports have depressed some local labor markets. But unless I’m mistaken the paper doesn’t tell us anything about the macro effects of Chinese exports, which would require a macro model. … They also don’t discuss all the jobs created in places like Seattle and Silicon Valley, as a result of China trade. Without exports, how would China be able to buy all those Boeing jetliners? In fairness, ADH do admit that their study may miss important linkages in high tech and business services, but this admission occurs only in a footnote …
A further issue is that measured input-output linkages may miss some positive demand effects from U.S. exports. Consider the iPhone, whose back panel states, “Designed by Apple in California. Assembled in China.” From its U.S. headquarters, Apple offshores production to Foxconn, which employs 300,000 workers in its iPhone operations in China. If productivity in Foxconn rises, iPhone sales may expand, thereby increasing demand for design services among Apple’s 50,000 US employees. However not all of Apple’s design exports to China may appear in U.S. trade data. For tax purposes, Apple may attribute some iPhone revenues to overseas subsidiaries. These revenues would not appear in the US current account until the earnings are repatriated, possibly far in the future. A similar logic applies to U.S. business services that may expand as a result of increased trade with China. …
Although Chinese exports are a small share of GDP, they are very important to the sort of low and middle-income workers who shop at places like Walmart. Trade with China has improved living standards for millions of Americans. These media reports seem way too pessimistic to me, unless I’ve completely misread the ADH paper. …
Much of this is keeping with my recent The Week piece:
On the other hand, there have been gains to U.S. welfare — especially to that of lower-income Americans — from cheaper imports. Since poorer families spend a larger share of their income on such goods than wealthier families do, their inflation rate has been lower, and their purchasing power higher. A 2008 study taking this differential into account found it offset the rise in measured income inequality from 1994 through 2005. But set those potential consumer gains aside for a moment. Even knowing what we now know about the possible impact on U.S. jobs, should Washington have somehow limited trade and overseas investment with China — even at the cost of higher global poverty? Certainly the humanitarian answer is “No.”
What’s more, I’m not sure what set of plausible public policies could have significantly offset the one-time economic shock to advanced economies of hundreds of millions of low-wage workers fully entering the global trading system. There’s also a longer-term economic benefit to the U.S. and the rest of the world from poor people getting richer, healthier, more educated, and adding their brainpower to the global intellectual stock for new invention and innovation.