Gains And Loses From Trade With China

From the conclusion to a provocative paper by David Autor, David Dorn, and Gordon Hanson, entitled The China Syndrome: Local labour Market Effects of Import Competition in the United States:

our study suggests that the rapid increase in U.S. imports of Chinese goods during the past two decades has had a substantial impact on employment and household incomes, benefits program enrollments, and transfer payments in local labour markets exposed to increased import competition. These effects extend far outside the manufacturing sector, and they imply substantial changes in worker and household welfare.

The authors reach these conclusions using an interesting instrumental variables approach, where the instruments for import growth into US commuting zones using Chinese import growth into other income countries. The relationship between employment and (instrumented) import exposure is illustrated in Panel B of Figure 3.

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Figure from Autor, Dorn, and Gordon (2011).

While there are losses along several dimensions (employment, wages, deadweight losses associated with transfers), there are also gains. Putting these together, the authors conclude:

Our results suggest that the strong focus of previous literature on wages misses important aspects of labour-market adjustment to trade. We find that increased exposure to low-income- country imports is associated with rising unemployment, decreased labour-force participation, and increased use of disability and other benets, as well as with lower wages. Comparing two CZ’s over the period of 2000 through 2007, one at the 25th percentile and the other at the 75th percentile of exposure to Chinese import growth, the CZ at the 75th percentile would be expected to experience a differential 4.1 per cent fall in the number of manufacturing employees, a 0.8 percentage point fall in the employment to population rate, a 0.8 per cent fall in mean log weekly earnings, and increases in per capita unemployment, disability, and income assistance transfer benefits on the order of 2 to 3 per cent. Hence, federally funded transfer programs, such as Social Security Disability Insurance (SSDI), implicitly insure U.S. workers against trade-related employment shocks. Import exposure also predicts a large but imprecisely measured increase in benefits from Trade Adjustment Assistance (TAA), which is the primary federal program that provides nancial support to workers who lose their jobs as a result of foreign trade. However, TAA grants are temporary, whereas most workers who take-up disability receive SSDI benefits until retirement or death (Autor and Duggan, 2006). For regions affected by Chinese imports, the estimated dollar increase in per capita SSDI payments is more than 40 times as large as the estimated dollar increase in TAA payments.

I have a few observations.

I think it’s important to remember, when comparing costs and benefits, that this is the welfare levels with China under (relatively) free trade against the welfare levels without China, and not against autarky.

Further, as the authors note, over time some of the costs (transfers and associated dead weight losses) disappear, so the benefits eventually outweigh the gains.

Finally, as I observed at the conference where some of these results were mentioned, it is unclear whether the trends (and hence impacts) that held over the 1990-2007 period would persist into the future. Chinese wage rates are rising (as noted here and here), and US exports to China might accelerate.

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Figure 1: U.S. goods exports to China, in millions of 1982$, n.s.a. Nominal values deflated by PPI for finished goods. Source: FREDII, and author’s calculations.

Even when the benefits outweigh the costs, the tabulation of gains and losses by groups highlights the facts that international trade has distributional consequences. That realisation should not induce policymakers to hinder trade via protectionist measures. Rather it reminds us that transfers from gainers to losers is a prerequisite for trade to be Pareto improving.

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