Yes, Free Trade Is a Good Thing – But That’s Not the Whole Story


twenty20_b294a9cb-581c-43e8-8235-f162b39ae802_china_market-e1458062734431Often missing — or underplayed — in the current debate about trade is what a one-off the China trade shock was. The most populous nation on earth, abundant with low-skill labor, suddenly coming online, to sustained negative effect in some US communities, is documented in “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade,” by David Autor, David Dorn, and Gordon Hanson.

While trade was always understood by economists to have trade-offs in theory, it hadn’t really worked out that way in the postwar era. There wasn’t much evidence trade hurt low-skill workers in the long-term, Autor notes in a must-listen EconTalk podcast with Russ Roberts. Much of the decline in manufacturing employment was driven by technology, not globalization. And trade was pretty much happening among advanced economies. High-skill workers competing with high-skill workers. Then came China.

Autor in the podcast:

China’s share of world manufacturing exports, measured in dollar terms, went from approximately 2% in 1990 to about 17% in 2012. Value added–the difference between what you buy and what you sell, effectively its share of world manufacturing — went from 5% to 25% in that period. Which is just remarkable.  … And that led to a substantial decline of employment in import-competing manufacturing plants. And some of those plants are, you know, quite, quite large. So, furniture plants that employed more than 10,000 workers. There were a not-trivial number of them, and almost all of them closed up. If you are actually making finished furniture, it’s very labor intensive. And labor costs in the United States are considerably higher than they are in China, especially around 1990 or 2000. And so though a lot of those firms or those plants just got wiped out, and we estimate the numbers in our work–it’s somewhere on the order of, conservatively about one and a half million workers. …

We estimate that about 25% of the decline in U.S. manufacturing employment between 1990 and 2007 was due to China’s rising competitiveness; and about 45% between 2000-2007.

And as Autor, Dorn, and Hanson note in their paper: “Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income.” But Autor stresses he isn’t anti-trade:

In aggregate, trade is growth-enhancing, increases the total output of countries; and there are other long-term benefits as well: it improves the competitive landscape, it improves the variety of products and services available, and it helps lots of countries grow and experience benefit from the technologies and innovations and variety of great stuff made around the world. So there’s a very strong case for trade, in general.

What’s more, the China trade shock is over or close to it as Chinese wages continue to rise. So now what? Autor:

Again, you come down to the same bottom line about trade, which is: It’s raising GDP — and we don’t dispute that question. And look, you and I benefit from a lot. But it’s definitely making some people have much more challenging livelihoods. And they are not going to be compensated simply by having lower prices on, you know, stuff at Walmart. That’s not going to make up that ground. So, we ought to at least–recognizing that, that doesn’t mean we shouldn’t trade. It means that we ought to think about the set of policies that can at least help. I don’t think there’s any way you are going to make that adjustment painless. But you might try to make it less painful. Or simply acknowledging that it exists is already a step forward. Because I think the conventional wisdom is so strongly in the camp of “could happen in theory but doesn’t happen in practice.” …

There are always going to be two things you need to do simultaneously. One is going to be investing in people to create opportunities; that means investing in k-12 education, but it also means a better vocational training system.  …  And then of course we are also going to have to have social insurance programs – because not everyone’s going to win – so in my opinion we should have readily available healthcare. Kids who don’t have very fortunate parents should still go to very good schools and should still live in safe neighborhoods. And we should invest in the infrastructure that allows more manufacturing to occur here. Manufacturing is growing in the United States again. It’s much less labor intensive but we do have relatively low wages, low energy prices, and pretty good infrastructure – not what it should be – but there are ways we can invest to create those opportunities.

I think over the long run it has to be about people’s skills, but in the medium run it also has to be about social assistance, and investments, some of which may not have high rates of return viewed in the rawest terms, but would have high returns if you think that having people gainfully employed is itself a good. And it also makes you think about how frequently you want adjustments to occur. So even if we agree we want no trade barriers, we might say, “Well if we have a 25% tariff on cars and trucks, maybe we don’t want it to go to zero overnight. Maybe we want it to go to zero over a ten year period.” I think the speed of adjustment really does matter because people have finite careers. If I’m 55 and you tell me my auto job won’t exist ten years from now, I’m not that upset about it. So the rate at which things change affects how disruptive they are, even if you are going to the exact same place.

A few other things I’ve written about trade:

What was the impact of the ‘China trade shock’ for US workers since 2000?

What would Trump’s trade policy look like in action?

China, Apple, and Donald Trump’s economic nostalgia

Trade has trade-offs. This should not surprise anyone

Published in Economics
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There are 9 comments.

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  1. I Walton Member
    I Walton

    Social assistance?  Wow that’s imaginative.  Surly something so new will foster adjustment.

    • #1
  2. J. D. Fitzpatrick Member
    J. D. Fitzpatrick

    Very nice points, James. Thanks for presenting them.

    • #2
  3. David Foster Member
    David Foster

    China is not the only low-wage country in the world that is or wants to be involved in manufacturing.  Significant amounts of production are now being done in Vietnam.  Mexico, if it could get its act together just a little bit better, could be formidable given the logistical advantages of geographical proximity and land vs sea transportation. Africa has barely begun industrialization.  So I’m not sure what is “one-time” about phenomena created by the China transition.

    Also, the offshoring or importing of *services* probably still has a long way to go.

    • #3
  4. Paddy Siochain Member
    Paddy Siochain

    I think sadly FREE TRADE has long since left the economic theory world and become an unthinking dogma of many libertarians. I’m sorry but as a history and economics teacher I’m sickened at how Free Trade is thrown out there as a good thing all the time. It is most certainly not. I’ll be writing my own post soon in response.

    • #4
  5. Ward Robles Inactive
    Ward Robles

    This is well worth the time- a uniquely civilized and illuminating discussion between one of my free market heroes, Russ Roberts, and a more centrist but reasonable academic, David Autor, of MIT. An interesting debate is briefly raised when Autor alleges that China is financing our national debt by buying our debt and assets with our trade deficit dollars, helping our Fed keep interest rates at near zero. Roberts pushes back, but not too hard.

    • #5
  6. I Walton Member
    I Walton

    Ward Robles:This is well worth the time- a uniquely civilized and illuminating discussion between one of my free market heroes, Russ Roberts, and a more centrist but reasonable academic, David Autor, of MIT. An interesting debate is briefly raised when Autor alleges that China is financing our national debt by buying our debt and assets with our trade deficit dollars, helping our Fed keep interest rates at near zero. Roberts pushes back, but not too hard.

    The whole world buys our dollars so we don’t face balance of payments problems like a normal country.  If we did  we would figure out that the administrative state is destroying the economy.

    • #6
  7. Frozen Chosen Inactive
    Frozen Chosen

    What this article shows is that economic development, on both a national and international basis, is linear in nature and not cyclical. Like the earth’s climate, our economy is always changing due to world events (WWII), technology and emerging nations.

    It’s always going to be a bit of a bumpy road responding to these changes in a manner which keeps our national economy strong but a constitutional government in DC and a moral people could successfully navigate the road.  Unfortunately we definitely do not have the former and it’s looking more and more like we do not have the latter either.

    • #7
  8. Duane Oyen Member
    Duane Oyen

    Cost is not all labor.  If your labor is more costly, cheap energy can make up for it.  Regulation adds, taxes, labor costs are boosted significantly by mandated benefits and barriers to change (like the UAW’s featherbedding).  You can make up for labor costs, but you can’t make it if everything is boosted- say, to fight “global warming” so you don’t explore for oil and gas.  The environmental regulation people effectively drove electronics chip fab offshore.

    China only skimmed the industries that were marginal and looking for a different way.  And now they are losing to lower labor cost countries.

    You can’t throw up a fence around the country and expect to prosper.

    • #8
  9. Manny Coolidge

    There’s just something wrong when Americans invent ipods and ipads and within one year, they are being built in an Asian country where factories were set up by American engineers.  We had the intellectual capital to invent it, the intellectual capital to know how to manufacture them efficiently, but the workers in some other country get to earn salaries and our workers are working service jobs or on welfare.

    I can’t speak to the economic efficiency but the moral deficiency is obvious.

    • #9
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