Oct 3, 2011

Chinese exports and US jobs

Paul Krugman argues:
Rob Johnson of INET sends me to an interesting paper by Autor, Dorn and Hanson (pdf) that uses regional data to estimate the impact of China imports on manufacturing employment. The idea is to exploit the major differences among US metro areas in industrial specialization: some areas produce a mix of goods that is in effect in China’s path, while others don’t. The results suggest, as I have been arguing, that it’s wrong to dismiss Chinese exports as not really being in competition with US production.
Now, some people will ask, didn’t I used to be a free-trader? Yes, and under normal circumstances I still mostly am. But these are not normal circumstances! In an economy that isn’t in a liquidity trap, one can reasonably assume that jobs lost due to Chinese exports will be offset by jobs gained elsewhere, although that may be small comfort to the workers affected. Under current conditions, however, there is absolutely no reason to believe that there are offsetting gains — on the contrary, the losses to import competition are magnified through multiplier effects.
Like everything in economics, support for free trade should be based on analysis, not slogans. And if you’re in a situation where the analysis says normal rules don’t apply, then they don’t apply.
I wonder how much of this is due to a global creative-destruction. Jobs lost due to Chinese exports in the US are offset by more Chinese jobs, until a new equilibrium is reached. 
This is the abstract of the paper Krugman links to:
We analyze the effect of rising Chinese import competition between 1990 and 2007 on local U.S. labor markets, exploiting cross-market variation in import exposure stemming from initial differences in industry specialization while instrumenting for imports using changes in Chinese imports by industry to other high-income countries. Rising exposure increases unemployment, lowers labor force participation, and reduces wages in local labor markets. Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment. Transfer benefits payments for unemployment, disability, retirement, and healthcare also rise sharply in exposed labor markets. The deadweight loss of financing these transfers is one to two-thirds as large as U.S. gains from trade with China.
Why does the abstract does not mention the China gains? 
From the conclusion of the paper:
The value of annual U.S. goods imports from China has increased by a staggering 1,156% from 1991 to 2007. 
While most observed trade flows into the U.S. are the result of both supply and demand factors, the growth of Chinese exports is largely the result of changes within China: rising productivity growth, a latent comparative advantage in labor-intensive sectors, and a lowering of trade barriers. In light of these factors, we instrument for the growth in U.S. imports from China using Chinese import growth in other high-income markets.
Overall, our study suggests that the increase in U.S. imports of Chinese goods during the past two decades has had a large impact on employment and household incomes, benefits program enrollments, and transfer payments in local labor markets exposed to increased import competition. These effects extend outside manufacturing and imply changes in worker and household welfare. 
This is getting really interesting. If the US closes itself to China, it might do what China did in the past, and the prospects are not very bright.

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