What’s Wrong with China Trade? Ask the Candidates

A Hyundai cargo ship navigates its way into port in Shenzhen, China Photograph by Daniel Berehulak/Getty Images

China is the bipartisan bulls eye of choice in the U.S. presidential campaign. The Obama administration has been filing election season complaints with the World Trade Organization that China is unfairly subsidizing auto exports, even as it simultaneously hypes its bailout of U.S. car companies. Mitt Romney has promised to be even tougher, vowing he’ll designate China a currency manipulator—despite the fact that while at Bain Capital, he was happy to invest in Chinese companies that exported to the U.S. by exploiting the same exchange rate.

It’s not surprising that Americans are ambivalent, at best, about trade with China. But they shouldn’t blame the Chinese. It is weak policies in Washington that have turned the unambiguous benefit of trade with a growing China to the U.S. into a policy with serious consequences for domestic manufacturing employment.

The share of total U.S. spending on Chinese goods has risen from $1 of every $170 in 1991 to $1 out of every $22 in 2007. The major reason why Chinese imports have risen so fast over that period is because they are cheaper than products produced in the U.S. Christian Broda and John Romalis of the University of Chicago attempt to calculate (PDF) how much the flood of cheaper-priced Chinese imports has benefited Americans—in particular, lower-income Americans. From 1999 to 2003, they estimate, rising Chinese imports reduced the price of non-durable goods by 2.8%. Since poorer people buy more non-durable goods than rich people as a proportion of overall expenditure, Chinese exports had a particularly beneficial impact on people at the bottom of America’s income distribution. Over the longer period from 1994 to 2005, prices for goods purchased by the poorest tenth of the U.S. population increased by 6 percentage points less than prices for the richest 10 percent of Americans.

In a paper written with David Weinstein at Columbia University, Broda also noted that a huge benefit of trade is to increase choices among goods. With global trade, you can choose between Hershey’s Kisses or Belgian truffles, Bud Light or Amstel (HEIO:NA) Light. The economists estimated that in 2001, the value to U.S. consumers of that extra choice was worth about $260 billion, or 3 percent of U.S. gross domestic product.

Developing countries export ever-more different types of goods to the U.S., expanding choice. China, for example, exported only 510 different types of goods to the U.S. in 1972. By 2001, that had climbed to 10,199 different goods, according to Broda and Weinstein.

Put these two factors together—lower prices and more choice—and they suggest that imports from developing countries have been a considerable boon for average Americans, perhaps especially for the poorest. Cheaper goods will also have made the U.S. economy more efficient, which is good for overall employment.

The trouble is that some of those imports replaced goods formerly made in U.S. factories by American workers. MIT’s David Autor and colleagues argue (PDF) that Chinese exports were responsible for job losses in manufacturing equal to around eight of every 1,000 people of working age in the U.S. from 1990 to 2007—as many as 1.5 million jobs. Analysis for the National Bureau of Economic Research by Harvard’s Avraham Ebenstein and colleagues also suggests that increased competition from enterprises in the developing world has had a significant downward effect on U.S. manufacturing wages and employment.

The federal government was pretty useless when it came to helping displaced American factory workers. David Autor’s work suggests that the Federal Trade Adjustment Assistance Program—the system set up to help displaced workers—was an almost insignificant force in helping people adjust to greater competition from imports from 1990 to 2007. Each $1,000 in growth in Chinese imports per U.S. manufacturing worker across U.S. regions was associated with just 23¢ per adult in additional trade adjustment assistance. Compare that with Social Security disability payments, in-kind medical benefits, and other assistance and retirement benefits, which increased by a total of $47 per $1,000 in growth in Chinese imports per exposed worker. The evidence suggests that federal dollars largely helped people in exposed industries exit the labor force, rather than move on to new jobs.

To see how U.S. policymakers could have done things differently, consider the experience of Germany. Wolfgang Dauth and colleagues, writing for Germany’s Institute for the Study of Labor, looked at the country’s rising trade with Eastern Europe and China. They concluded that import-competing industries did suffer job losses, just as in the U.S. But in stark contrast to the U.S., the losses were not as large as the job gains by German export-oriented firms. Over the period from 1988 to 2008, global trade integration led to the creation of an additional 493,000 German manufacturing jobs. The regions that lost manufacturing employment to import competition didn’t see rising unemployment. German measures to retain, retrain, or help workers move to new job opportunities were apparently a lot more effective than the U.S. Trade Adjustment Assistance Program was.

The lessons are twofold: First, the overall benefit to the U.S. of trade with China remains positive. Second, if the U.S. had better policies for helping employees move to new occupations, the negative manufacturing jobs impact of trade with China could have been significantly reduced—or even reversed. If every American is to benefit from trade, government has to step up to the plate. And if the candidates were willing to discuss this issue during the debates over the next two weeks, it would have a lot more value than the China-bashing in their advertisements.

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