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Does trade with China hurt American workers?

Rochester Business Journal
May 2, 2014

Until fairly recently, American workers were little affected by trade with the low-income nations of the world. This is because historically, imports from these nations constituted a small fraction of all imports entering the United States. However, this peaceful state of affairs began to change dramatically with the onset of globalization and the economic rise of China.

As pointed out by economists David Autor, David Dorn and Gordon Hanson, between 1991 and 2007, the value of annual U.S. goods imports from China increased by a staggering 1,156 percent. In contrast, U.S. exports to China grew much more slowly. This dramatic increase in U.S. exposure to trade with China has led to questions about the effects of this trade on American workers. Many are convinced that U.S. workers inevitably lose, and there are increasing calls for “managing” our trade with China.

What does data-driven research tell us about the fate of American workers exposed to increasing imports from China? Let us find out.

Autor, Dorn and Hanson have shed light on this question. In one line of research published in the American Economic Review, these researchers have examined the effects of increasing Chinese imports on U.S. local labor markets. This empirical study shows that the increased exposure of local labor markets to Chinese imports results in higher unemployment, lower labor force participation and diminished wages. We learn that the employment reduction is concentrated in manufacturing and that it explains 33 percent of the total decline in manufacturing employment in the United States from 1990 to 2007.

These employment and wage reductions have resulted in a significant drop in the average earnings of households. The decline has in turn led to rising transfer payments—unemployment insurance benefits, disability benefits, income support payments and in-kind medical benefits. These payments have not offset the large reduction of mean household incomes found in local labor markets with the greatest exposure to trade with China.

In a second line of research, the three economists analyzed the impact of increasing trade with China on the long-term earnings of individual U.S. workers. The specific focus here is on workers who in 1991 were employed in manufacturing industries that were exposed to high growth in imports from China. The analysis shows that from 1992 to 2007, the workers under study had lower cumulative earnings and faced the real prospect of receiving Social Security disability insurance benefits as the only source of income in a given year.

How do these sobering findings align with the predictions of trade theory? The theory is clear that when one nation trades with another on the basis of the principle of comparative advantage, both nations gain in the aggregate.

Even so, two aspects of this finding are worth emphasizing. First, the “both nations gain” finding does not mean that everybody in a nation gains. Typically, workers in the export sectors gain and those in the import-competing sectors lose. In the context of trade with China, the theory says that American workers employed in sectors that compete with Chinese imports can expect to lose from trade, and this is what Autor, Dorn and Hanson have demonstrated.

Second, if a nation benefits in the aggregate, it means simply that those who benefit from trade could compensate those who lose and still be better off. This demonstrated superiority of free trade over no trade does not involve the payment of actual compensation to the losers. In the real world, however, there are losers, and therefore the Trade Adjustment Assistance program does provide some help for U.S. workers harmed by imports. But relative to the magnitude of the rising transfer payments mentioned above, TAA is minuscule.

The combination of the dramatic distributional consequences for workers, the efficiency losses, and the minimal assistance from the TAA program helps explain the ambivalence many Americans feel about trade with China. Nevertheless, as Jagdish Bhagwati and others have noted, trade with China and other nations has significant benefits for U.S. consumers, and it is unlikely that trade in the aggregate makes the U.S. worse off.

To build support for continued trade with China, we need to expand the TAA program and ensure that our own exports to China are widely available to consumers on competitive terms.

Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology, but these views are his own.

5/2/14 (c) 2014 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


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