The China Shock was Matched by a China Boom

We have always known that trade and technology shocks destroy some jobs and create others with the change in equilibrium typically being zero net job losses and a net positive effect on wages. Increases in imports, for example, should be matched sooner or later by increases in exports as foreigners aren’t sending us goods for nothing. The China Shock paper of Autor, Dorn and Hanson seemed to suggest that the job losses were not matched by job gains. The paper’s clever identification strategy, however, was much stronger on identifying the losses than the offsetting gains (see e.g. Scott Sumner.)

New research by Feenstra, Ma and Xu and Feenstra and Sasahara (summarized here) shows, that as theory predicts, there were offsetting gains. Feenstra, Ma and Xu use similar techniques to ADH and find big offsetting increases in exports:

Our empirical results show important job gains due to US export expansion. We find that although imports from China reduce jobs, the global export expansion of US products creates a considerable number of jobs. Based on the industry-level estimation, our results show that on balance over the entire 1991-2007 or 1991-2011 periods, job gains due to changes in US global exports largely offset job losses due to China’s imports, resulting in about 300,000 to 400,000 job losses in net. Estimation at the commuting zone level generate even bigger job creation effects: in net, global export expansion substantially offsets the job losses due to imports from China, resulting in about 200,000 net job losses over the period 1991-2007, and a roughly balanced net effect if we extend the analysis to 1991-2011.

(Note that the net job loss figures are rounding error in an economy where there are millions of hires and separations every month).

Using a second, quite different, approach based on input-output calculations they find similar results in manufacturing but an even bigger effect on services:

We find that the growth in US exports created demand for 2 million manufacturing jobs, 500,000 resource-sector jobs, and a remarkable 4.1 million jobs in services, totalling 6.6 million. The positive job creation effect of exports in the manufacturing sector, 2 million, is quantitatively similar to the result in Feenstra et al. (2017), in which 1.9 million jobs were created by US exports from the instrumental-variable regression approach. On the import side, our analysis shows that manufacturing imports from China reduced demand for US jobs by 1.8-2.0 million, which is similar to the result in Autor et al. (2016), who finds a decline of 2.0 million jobs due to imports from China.

The authors conclude:

Our results fit the textbook story that job opportunities in exports make up for jobs lost in import-competing industries, or nearly so. Once we consider the export side, the negative employment effect of trade is much smaller than is implied in the previous literature. Although our analysis finds net job losses in the manufacturing sector for the US, there are remarkable job gains in services, suggesting that international trade has an impact on the labour market according to comparative advantage. The US has comparative advantages in services, so that overall trade led to higher employment through the increased demand for service jobs.

Comments

So that's it. There is plenty pottage from where it came.

Comparative advantage? I studied economics as an undergraduate back in the late 1960s and early 1970s when "comparative advantage" weren't fighting words. Today they are. Don't get me wrong. The advantages of comparative advantage were ingrained in me much like religion; and like religion, it's very difficult to let go. So comparative advantage it is. Of course, many of those service jobs that have replaced manufacturing jobs are low-skilled, low-paid jobs. But beside that, I don't believe economists consider the full implications of manufacturing jobs being shifted to low cost countries such as China. On innovation, for example. Why would a company invest in labor saving innovation when labor is cheap? Why would a company invest in innovation if the innovators are in the U.S. and manufacturing is in China? Indeed, why would a company in the U.S. even hire innovators? They might hire experts in currency trading and hedging, but not innovators in industrial production. What about the high-skilled, high paid service jobs in the U.S. that have replaced the manufacturing jobs such as computer engineering and quantitative math? It's true, the U.S. has become the leader in the creation of those jobs. And what's not to like about them, inasmuch as they are not dependent on a large supply of skilled labor in the U.S. to actually manufacture goods, innovation by the "tech" firms of today focusing on such things as mining Bitcoins or exploiting anomalies in financial markets or ride-hailing services such as Uber. Indeed, consider the political advantage, as these new high-skilled firms are creating an army of libertarians, the innovations they create not being dependent on an army of skilled labor to actually manufacture any goods. Okay, there are political disadvantages, such as the rise in populism, on both the left and the right. Back in the old days when I was an undergraduate, "comparative advantage" meant that developing countries supplied the natural resources used in manufacturing and the developed countries supplied the skilled labor to do the manufacturing, a win, win, so who complained. I suppose the really cheap labor in the developing countries used to extract the natural resources. Out of sight, out of mind. The real "innovation" occurred when the U.S. adopted a policy of a "strong dollar" to coincide with a policy of free trade. Now that's innovation. Cowen worries that there's too much complacency and, thus, we need more "disruption" so innovators will be motivated to innovate. More disruption? Maybe Cowen and Tabarrok haven't noticed all the disruption (including political disruption) all around us. Now that's the kind of "comparative advantage" that might free me from the religion ingrained in me when I was an undergraduate.

Rayward, there is this handy tool called the paragraph you could start using.

The headline seems to me to be implicitly attributing the increase in US global exports to China alone.

While Trump gets a lot of criticism on trade, I think he has a good intuitive feel about trades impact on many American families, especially in rural areas NAFTA was often falsely sold within fully explaining that it would have both winners and losers. And many of those losers have been in manufacturing. Walmart and others have been brutal on suppliers and in the process outsourced many jobs. That means that consumers may have greater variety at lower costs but some workers have lost their jobs.

Trying to calculate the winners and losers from increased trade has, I think, led to some false accounting. The dislocations, the lost jobs, have been more negative in many communities then traditional models imply. Many areas became centers for manufacturing because of a confluence of events. The founder was nearby, access to some required input, population trends, or a rather random event etc. But once that factory closes in a community there can be little incentive for a new employer to move in. The strange chain of events that may have made a community a hub for activity (along with related support jobs) disappears. Many Trump supporters in the last election live in these communities. They live in the shadows of empty factories without any realistic prospects for another employer entering their community. Certainly not at wages or with the perceived stability they may have had in their community for a generation or more.

Service jobs may replace some of those lost jobs. But in these communities that means lower lifetime earnings in a community with declining home values, and less mobility. Less mobility because the types of jobs they and other family members can secure in other locations often mean moving to communities where they will not have traditional support networks, where crime will increase, schools quality will decline, and the quality of life they had will disappear. They can not afford the type of protections that access (money) to better communities can provide. And if they stay they will watch their young people leave, hope dies, and the community begins a long death spiral. With drug addiction and assorted evils becoming all too common. Damned if you do, damned if you don't.

Job retraining programs for workers past forty don't increase lifetime earnings. Most government programs do little but maintain cycles of dependency. Wait unemployment for new employers to enter the community is wishful thinking.

Urban communities have some of the same problems. Except for the hope for government service sector jobs. Criminal activity and the drug trade are not a path to a stable future. It isn't even a good source of income for the majority of participants in the drug trade. You have incentives for gang formation as protection against other predators and a source of some income and support. But that hardly solves the problems.

In summary, while free trade with China may encourage increased efficiency in some sectors, lowered prices for some goods, and led to growth in some service sectors, it has adversely impacted some communities. The negative impact is far from trivial and is very difficult to reverse.

"Free trade" is a theoretical concept in any event. "Free trade agreements" have the same issues of rent-seeking, externalities, etc. as any government decree or regulation.

I've started thinking we may be down to two choices: we either subsidize people at the cash register or we subsidize them via government transfer payments. The former is probably more salutary.

I am not against free trade. And when Trump says he isn't against free trade but wants fair trade, I don't know what that means in practice. Maybe better rent-seeking.

If free trade means that we have been able to make some millionaires (and a few billionaires) in tech/service while gutting many rural communities, well that was the trade-off for cheap manufactured goods.

In one sense both sides become richer, just the distribution was lumpy. Unemployment stayed low, that's nice, but wages were pushed down, bad for some, some stuff became cheaper, that's nice, ..... tradeoffs

My first point was that "free trade" is not really free. Every such-called agreement has numerous government regulations attached and generally does not eliminate tariffs. Frictionless trade with no government involvement is theoretical, so it's not really honest to say, for example, that Brexit is a blow to "free trade." There are numerous government externalities and all sorts of log-rolling, rent-seeking, bureaucracy, etc. with EU trade agreements.

Given the reality, my second point was that we apparently will pay the welfare in either event, and I'm starting to wonder if cheap stuff from China via Walmart is really worth it in light of opioid epidemics, rural and urban blight, social dissolution, etc.

Think of "fair trade" as a type of UBI, and with less downside than simply paying people to sit on a couch and be addicts.

My first point was that “free trade” is not really free. Every such-called agreement has numerous government regulations attached and generally does not eliminate tariffs.

Plenty of them do eliminate tariffs eventually on a wide variety of goods. The vast majority of the pages and regulations in most of them are schedules for slowly eliminating the current tariffs and regulations that currently exist. Most "fair trade" advocates who make this point are at best blaming the agreements for the current log-rolling, rent-seeking, and government regulations, or at least blaming them for not immediately eliminating them. While I might prefer immediate free trade, it's certainly better than the status quo.. What makes it particularly pernicious is that it's usually "fair trade" advocates who insist on taking so long to eliminate the log rolling in order to avoid shock-- then they blame free traders for the very provisions fair traders insist upon! A large part of the other regulations that get put in these things are labor and environmental provisions again put in at the insistence of some fair traders (due to their concerns about "unfair competition.")

That said, there are a few things, like intellectual property extensions, that I find little good case for, but they hardly swallow the whole of the agreements, and it's certainly untrue to claim that tariffs aren't generally eliminated by these agreements.

The fair trade position is one of more log rolling and rent-seeking; the positions are not equivalent.

We should be clear, overall US manufacturing output is not low. Manufacturing Sector: Real Output is now back to just below its all-time high of Q4 2007. We just don't need people to sew the toes of socks any more, robots are doing that.

For example: "When the Chinese clothing manufacturer Tianyuan Garments Company opens its newest factory in 2018, it will be in Arkansas, not China, and instead of workers hunched over sewing machines, the factory will be filled with fully autonomous robots and their human supervisors." [but with probably 1/50 th of the workers] https://www.fastcompany.com/40454692/this-t-shirt-sewing-robot-could-radically-shift-the-apparel-industry

The reduction in need of manufacturing workers is also an issue in China, where 1.8 million coal and steel workers are to be laid off by the end of this year. https://www.ft.com/content/de33f222-af09-11e7-aab9-abaa44b1e130

Per McKinsey and Company

"But the decline has played out unevenly. In the past two decades, output growth in US manufacturing has been concentrated in only a few industries, including pharmaceuticals, electronics, and aerospace. Most other manufacturing industries have experienced slower growth or real declines in value added. The largest US manufacturers have managed to thrive despite growing headwinds, while small and midsize firms have been hit hard. Large firms have a stake in addressing this issue, since they face more risk without a healthy ecosystem of domestic suppliers to provide more agility and opportunities for collaboration."

https://www.mckinsey.com/global-themes/americas/making-it-in-america-revitalizing-us-manufacturing

In the old days when a US worker moved from agriculture to manufacturing it was a shift from a low productivity industry to a high productivity industry. It made a major positive contribution to real GDP and standards of living.

But now, when we shift a worker from manufacturing to services it is generally a shift from a high productivity, high wage job to a low productivity low wage sector. Now the shift dampens or reduces growth in productivity and standard of living.

What is it going to take to get this through to all those people who have not learned that economics is more complicated than what is taught in introductory economics?

Uneven distribution of these gains is a very good argument for limiting the SALT deduction, and as well reforming federal spending to the states so that it is more based on fiscal capacity, and less based on state matching funds. The current set up is designed to boost wealthy states, in the same way that offering to pay exactly 75% of college tuition anywhere someone goes is worth much more to the well-off than the poor.

Why are these Chinese students spending so much time convincing America to be open to free trade. We have very low tarriffs.

Its China that has higher tarrifs, and even worse, serious barriers to entry.

Physician heal thyself.

I always believed some more gains in U.S. employment might have occurred if U.S. firms such as Amazon, Ebay, Facebook, etc. had been allowed to compete fairly with Jack Ma's Alibaba and Ten Cent Solutions in China. I like WeChat better than Facebook, but others might choose differently if free to choose.

The US is "the land of the free and the home of the brave". Free people can buy stuff from anyone they want without being penalized. In fact, weren't tariffs and duties part of the impetus for the American revolution?

"the change in equilibrium typically being zero net job losses and a net positive effect on wages"

Easy to believe Feenstra et al's results that the former has occurred. A lot of Americans are still waiting for the latter effect to kick in.

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