By Michael R. STRAIN
Few issues in the public arena are untouched. But the narrative that the United States’ decision, driven by elite considerations, to open trade with China led to the loss of vast numbers of manufacturing jobs and deindustrialization comes close. Democrats and Republicans, the mainstream media, commentators of all stripes, and even economists support, promote, and defend this version of events. Yet every bit of it is incorrect.
Did the increase in U.S. trade with China after the 2000 decision to permanently normalize trade relations and China’s accession to the World Trade Organization in 2001 lead to a large reduction in manufacturing employment? In their 2013 paper, economists David Autor, David Dorn, and Gordon Hanson find that increased exposure to Chinese import competition is associated with a net reduction of 1.5 million jobs in U.S. manufacturing from 1990 to 2007. In a paper with Daron Acemoglu and Brendan Price, they find that up to 2.4 million jobs were lost by 2011 to competition with Chinese imports. To assess whether these are large numbers of job losses, place them in the context of the broader dynamics of the U.S. labor market.
From 2000 to 2007, more than five million workers, including about 425,000 manufacturing workers, were laid off by their employers in a typical month. There was nothing unusual about that period—these figures have been similar over the past five years. Moreover, when it comes to trade liberalization, import competition is only half the story. In the 1980s, 1990s, and 2000s, trade with China, and globalization more broadly, led to increased opportunities for American exporters. Economic theory suggests that trade liberalization should have little effect on overall U.S. employment because job losses from import competition can be balanced by job gains in export-intensive firms and sectors. Economist Robert Feenstra and his coauthors try to consider both sides of the balance.
In a 2019 paper, Feenstra and his colleagues confirm the “China shock” result, finding that 1.9 million jobs were lost between 1991 and 2011 due to import competition from China, with more jobs lost to global import competition. But they also find that an almost equal number of jobs were gained due to export expansion. It should also be noted that the share of manufacturing in total employment in the US followed a relatively gentle downward trend from the early 1950s until the 2008 financial crisis, when falling productivity actually caused the trend to slow. This decline preceded the “China shock” by decades. And there was no apparent break in the trend in manufacturing employment in 2000 or 2001, which is consistent with the idea that, in the long run, declines in manufacturing employment have been driven primarily by productivity growth, not trade competition.
Finally, the United States did not decide to open up trade with China in the 1990s in the same way that I decided to have a third espresso this morning. The decision was not at all that simple or isolated. Yes, China was granted permanent normal trading relations status in 2000, and it became a member of the World Trade Organization in 2001. But the United States had renewed China’s normal trading relations status every year since 1980, and U.S. trade with China grew rapidly in the two decades before its WTO accession. By my calculations, China’s share of total U.S. imports rose during the 1980s, reached 2.5% in 1989, more than doubled to 5.4% by 1993, and was 8% in 1999.
This trend continued after China joined the WTO. China’s share of total U.S. imports doubled again, from 8.2 percent in 2000 to 16.4 percent in 2007. But even this overstates the role of U.S. policy in easing the so-called “China shock.” China’s exports continued to grow in part because the U.S. eliminated the uncertainty created by the annual renewal of trade policy parameters before 2000. They also grew because of China’s domestic pro-market reforms—including the reduction of its tariff rates. Nor was the U.S. decision to trade with China made by a shadowy elite. China’s exports to America grew as a result of millions of decentralized, individual decisions. During the 1980s and 1990s, American consumers and businesses increasingly chose to buy goods made in China, a trend that continued after China’s entry into the WTO. It is wrong to present “comrade China” as evidence that trade liberalization hurts the working class, or that a powerful, shadowy, and evil elite is making deliberate, isolated decisions that harm most Americans.
The pertinent lessons to be learned from the 2000s are that it is harder than economists and politicians had thought for workers to move from a sector with shrinking economic opportunities to one with expanding opportunities. Moreover, workers are less willing to move from regions with shrinking opportunities than they once were—let alone at a rate that would create a new overall labor market equilibrium. These two lessons are broadly applicable, and politicians should keep both in mind as advances in generative artificial intelligence continue. They should be open to new kinds of policies—for example, public relocation assistance for workers in localities hit hard by economic disruptions, and potentially large income subsidies to help workers make the transition.
But politicians should not build walls around the economy or try to slow the pace of technological change. They should approach the future with optimism, not fear – freed from the mistaken view that economic dynamism and liberalism are obstacles to long-term prosperity, rather than its main drivers. (Politico.eu)