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Advocates of a trade war with China will likely seize on a new paper by David H. Autor, David Dorn, and Gordon H. Hanson, which concludes China’s entry to the World Trade Organization in 2001, a step that liberalized trade between the United States and China, cost 2.4 million American jobs as of 2011.
The authors are highly respected economists who have written about the issue for years but are not free-trade bashers. Last year, they came out in favor of the Trans-Pacific Partnership, writing that their results do not suggest trade in the aggregate is harmful, and that China’s unprecedented rise “bears testimony to trade’s transformative economic power.” The new paper research needs to be put in context, however. When it is, the case for free trade with China remains clear and strong.
A first problem with the paper is that the authors focus on one of the worst periods for the US job market in recent history, from 1999 to 2011, when the unemployment rate went from 4 percent to 9 percent (peaking at 10 percent in 2009) as a result of the greatest economic crisis in 75 years. The Great Recession compounded the difficulties for those that lost their jobs in the financial crisis to find other work, whether or not the jobs lost were due to trade. Certainly China contributed to these conditions, but poor macro policy bears most of the blame, along with a complete absence of policies to help people thrown out of work. To be fair, the authors do try and control for the crisis and find their results largely unchanged, but capturing the difficulty in changing industries after the crisis is extremely challenging and more time will be needed to fully understand it.
Autor, Dorn and Hanson acknowledge China is not the threat to US jobs it once was—and that “the great China trade experiment may soon be over, if it is not already.” China’s labor costs are rising rapidly, and its advantage of cheap labor is eroding. Indeed, the problem from free trade with China was likely a one-time event, and unique to that of only China given its size. This makes the lost jobs a “sunk cost,” one that cannot be recovered but that is also not likely to be repeated. Future costs are likely to be much smaller than the potential gains. Such improvements are not directly the subject of the Autor et al. paper.
And these could be enormous, according to a book authored by C. Fred Bergsten, Gary Hufbauer, and me, Bridging the Pacific: Toward Free Trade and Investment Between China and the United States, the United States and China each could see annual export gains of as much as $500 billion. The United States is a relatively open economy already, with import tariffs among the lowest of large nations, therefore many of the adjustment costs from increased imports have already occurred. The book also notes that most of the potential gains for the United States come from the increase in trade in services. The United States has a comparable advantage in the trade of services, from information technology, to healthcare, and engineering; and China has significant barriers to trade and investment in these areas. Persuading China to open up its service sector to foreign competition would create tremendous benefits for the US economy and significantly reduce the bilateral trade deficit. This also happens to align with China’s stated goal of transitioning its economy from an investment led model to one of more consumption and services.
Moreover, advocates of free trade have been criticized for downplaying the costs to workers and not speaking enough about adjustment assistance. Bridging the Pacific devotes a whole chapter to this important subject. Chapter 3 “Adjustment Challenges for US Workers,” written by Robert Z. Lawrence, says that “current US policies to aid dislocated workers and communities are woefully inadequate.” The book argues for policies that will significantly increase vocational-training and job search assistance, as well as very high amounts of compensation for wage-losses. The spending on these policies would be made possible by the tremendous boost received from increased free trade, and should be essential to any trade agreements. Unfortunately, political and budget constraints may continue to limit the substantial expansion of these programs in the United States.
Judging the impact of free trade by using only one 10-year period, especially one so unrepresentative, is myopic. A middle-aged worker in furniture manufacturing who loses their job to free trade is unlikely to move to pharmaceuticals or manufacturing jet aircraft, but their children might. Free trade should be judged in generational terms. Autor-Dorn-Hanson have also said free trade with China benefits the United States. The benefits from free trade are indefinite, but the costs are short-term. So if the US economy has already incurred the cost, it should also reap the bounties by convincing more countries to open up to US exports, including China.
