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Did China Eat America’s Jobs?

February 7, 2017

David Autor Examines Some of the Myths and Missteps of U.S.–China Trade

 

 

By Paula Klein

It’s the question of the day: How much was China’s economic rise at the expense of U.S. jobs? Discussions about the impact of Chinese manufacturing on U.S. employment may be decades old, but it’s never been more of a lightning-rod issue than it is right now.

A large part of Donald Trump’s presidential campaign hinged on his appeal to thousands of factory workers and other Americans who have steadily lost jobs or see unemployment in their future. And because automation’s huge role in this scenario was generally ignored during the elections, globalization-- and the strength of China’s economy, in particular-- were front and center.

These flashpoints were the key topics of a January 25 Freakonomics Radio episode,Did China Eat America’s Jobs? -- and MIT Sloan Economist, David Autor, was in the hot seat. Freakonmics author and radio host, Stephen J. Dubner, noted that a lot of political rhetoric argues that China has damaged the U.S. economy via currency manipulation, making Chinese goods even more attractive to American consumers. Dubner asked Autor to counter these and other charges in a wide-ranging and frank discussion.

Framing the conversation, Dubner said that: “For years, economists promised that global free trade would be mostly win-win. Now [Autor and others] say the pace of change has been ‘traumatic.’ Has China killed the American Dream, as Trump claims?”

The full program and transcript can be found here. What follows are some highlights of Autor’s comments from the interview.

  • Opening up trade with China was a very good thing. It brought 400 million Chinese out of poverty, raised incomes in Central and South America, and caused investment throughout Africa...But it was it was tough on U.S. manufacturing. There are always tradeoffs.
  • Economists have known since the 1950s that globalization, or the integration between trading partners, raises GDP and raises national incomes in both countries – if they’re consenting partners – but can have adverse distributional consequences. In other words, a rising tide does not always lift all boats. So even as globalization makes a country wealthier, it can make some people in that country poorer in absolute terms; it can grow the size of the pie, but make some slices sufficiently smaller.
  • A lot of our trade prior to China’s rise was between wealthy nations. But when China opened up, that changed. A lot of what we’re trading in China is labor-intensive goods. Everything that China was selling to the United States, until recently, could be made in the U.S.; it just couldn’t be made as cheaply. So this was actually about price competition rather than simply having a better or different variety.
  • We would conservatively estimate that more than a million manufacturing jobs in the U.S. were directly eliminated between 2000 and 2007 as a result of China’s accelerating trade penetration in the United States. That doesn’t mean a million jobs total. Maybe some of those workers moved into other sectors. We estimate that as much as 40 percent of the drop in U.S. manufacturing between 2000 and 2007 is attributable to the trade shock that occurred in that period, which is really following China’s ascension to the WTO in 2001.
  • The real job differentiator is the skill level of the worker; higher-paid and more highly educated workers seemed to reallocate successfully out of manufacturing into other jobs. So the shock to manufacturing affected everyone in the immediately targeted industry. But the differentiator is not what industry you were in specifically, but how skilled you were initially.
  • There are 3,000 counties in the United States. If 10,000 workers were eliminated, three from each county, you wouldn’t even notice it, right? But if 10,000 workers are eliminated simultaneously from your local labor market, that’s very noticeable, and it has add-on effects. For example, those manufacturers also stop buying delivery services and catering services; people have less income, so they go out to dinner less. All kinds of adverse multipliers set in.
  • If we had realized how traumatic the pace of change would have been, we would have, at a minimum, had much better policies in place to assist workers in communities that suffered these very severe and immediate consequences. And we might have tried to moderate the pace at which it occurred.
  • I don’t think there are any easy solutions, but there are a couple of things I’d do: One is to expand the Earned Income Tax Credit, which is a federal wage subsidy for people with low incomes. Basically it makes it more financially rewarding, more worthwhile, to work.  There are also tax changes that could be beneficial. One is the so-called “Border Adjustment,” which is like a value-added tax. And it could be used to offset other taxes, like our payroll tax, for example. Many countries do something that looks a bit like that. Other things are skills investments, and things that make the quality of life better for people with low incomes including the Affordable Care Act.
  • Many of those labor-intensive jobs are not going to come back. Even if the production returns the United States, it would be done with a lot more machinery and robotics. Manufacturing will continue to occur in the United States. I just don’t think it’s going to use that much labor.
  • It’s perfectly reasonable to aggressively enforce our trade deals, but we can’t turn back the clock. As soon as you start taxing Chinese goods, you’re taxing car parts that end up in say, GM and Ford and Fiat-Chrysler automobiles. You’ll quickly find that there’s a lot of opposition from U.S. manufacturers to restrictions on trade or tariffs. I don’t think Trump even realized that China was not a signatory to the TPP, and China was the country cheering loudest to see it crash and burn because it was basically establishing rules of the game with Asia and North America that would uphold intellectual property agreements, freedom and transparency of contracting, market access, and so on. So if we don’t set the rules of the game in Asia, China will... this kind of bluster against trade is ignorant and harmful to U.S. interests, and really harmful to our allies, especially Japan.
  • Contemporary economics is quite imperfect, but it’s at least guided by evidence, and economists are fully capable of changing their views based on evidence. I do not think the profession actually is nearly as ideological as it was 25 years ago...that’s about as good as social science gets. We’re not working with natural laws that can be as neatly summarized as Newtonian physics.

 

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