A new paper by the “China Shock” economists adds to the growing mountain of literature documenting the costs of free trade events to the U.S. economy over the past half century. Their new paper, On the Persistence of the China Shock, shows that increased unemployment, protracted withdrawal from the labor force, and other social ills have persisted in regions that lost jobs to Chinese imports for many years after the initial job layoffs. This builds on a series of “China Shock” research papers dating from 2013, all available at www.chinashock.info.
The China Shock papers have been highly influential because they are written by a team of economists at the top of the profession, including David Autor (pictured above), MIT professor and former vice president of the American Economic Association, and Gordon Hanson, professor at Harvard’s Kennedy School. Earlier this month, Hanson gave an interview in which he said the China Shock ended around 2010 when the rate of increase of Chinese imports into the U.S. slowed down. Strangely, in comments to the press, Hanson and Autor have repeatedly downplayed the damage these imports inflict upon U.S. workers and companies—even while their studies document that damage in great detail. They have also told the press repeatedly that they believe in “free trade”—even while their studies show the damage done by free trade events such as the opening of the U.S. market to Chinese imports after passage of Permanent Normalized Trade Relations with China (PNTR) in 2001.
In my view, the China Shock authors are playing a delicate, tactical game: they are trying to move the academic economics profession away from its rigid doctrinal support of free trade and toward a recognition of the realities of the last two decades of import-driven social and economic ills. These leading economists are worried that their profession (and mine) has already lost the support, and in many cases earned the contempt, of sectors of the U.S. public by its inflexible support of so-called “free trade” with nations like China. However, so strong is the reflexive belief of economists in free trade that Autor and Hanson know they must move cautiously or risk losing the support and respect of their fellow economists. Peer pressure is strong in the profession. The result is a mixture of contradictory statements. In theory and in principle, Autor and Hanson tell us they support free trade and think it is wonderful that China has lifted half a billion people out of poverty. In fact and reality, their China Shock papers paint a different picture—a U.S. heartland devastated by the flood of cheap, subsidized Chinese imports over the past 20 years.
The China Shock papers show that Chinese imports were responsible for a wide range of economic and social ills in regions and among people that could least afford such problems. Their new paper summarizes the message of the China Shock series of papers this way:
“Labor markets more exposed to import competition from China experienced more plant closures, larger declines in manufacturing employment, employment-population ratios, earnings for low-wage workers, housing prices, and tax revenues; and larger increase in childhood and adult poverty, single-parenthood and mortality related to drug and alcohol abuse, as well as greater uptake of government transfers.”[1]
Their new report adds to the China Shock literature by showing how persistent these losses and resulting social upheaval have been, and continue to be:
“Manufacturing job loss translated nearly one for one into declines in the employment-population ratio…Adverse impacts persist out to 2019, nearly a decade after the shock reached peak intensity…Impacts of the trade shock thus appear to be long-lasting and to entail suppressed participation in work.”[2]
For years argument has raged over whether the precipitous loss in U.S. manufacturing employment was due to imports or technological change. With standard econometric techniques based on statistical analysis looking at changes in the economy over time, it can be hard to disentangle the two effects. Instead of analyzing changes over time, the China Shock authors did a regional comparison. They compared the hundreds of towns and cities in the U.S. (which they term “commuting zones,” or CZ for short), ranking them by exposure to Chinese imports. They found a strong, statistically significant relationship between exposure to China imports and unemployment, as well as other economic and social afflictions. As they point out, technological change is widely distributed among all industries and all regions. But the China Shock was limited to areas exposed to China imports. By isolating the impact of China imports, they demonstrated that those imports were irrefutably the cause of harm to the U.S. economy. The authors put the direct impact of such imports at one to two million lost jobs, about 40% of all U.S. manufacturing jobs lost in the past two decades.
The most shocking single finding in the new “Persistence” paper is that, of the 722 regions analyzed, the authors say that 223 of them, or 32.8%, suffered absolute declines in real per capita income over the period of study. This is shocking. It means that so-called free trade, i.e. the open door for subsidized Chinese imports, reduced the incomes of one third of the U.S. public. Since U.S. GDP grew over this period, the losses in real income suffered by one third of our population were effectively transferred to another group, likely to be the top 20% that have done extremely well in the globalization era. Trade with China is effectively a vehicle to transfer income from the working class in the heartland to the affluent, who live mostly on the two coasts.
Tactical Economists
It is hard for non-economists to appreciate how fundamental free trade, as first promulgated by David Ricardo in 1817, is to economists’ conception of their doctrine and profession (at least in the U.S. and U.K.). It could be said that when you cut an economist, he bleeds the Law of Comparative Advantage. So Autor and his colleagues must move delicately, and keep the profession with them. Their strategy is to undermine free trade on a constant basis with every study, while verbally professing belief in it at every opportunity.
Here is David Autor explaining how the China Shock studies contradict economists’ received wisdom:
“What we really gained a different appreciation of was how costly this was at the level of individuals and communities…it was definitely not consistent with our received wisdom—that trade was almost a free lunch…This study pushed really strongly against that received wisdom that people can costlessly move from sector to sector…the shocks, because they’re so geographically concentrated, they’re highly, highly disruptive.”[3]
Earlier this year, Autor told the New York Times: “trade can have very, very disruptive effects…There‘s no amount of everyday low prices at Walmart that is going to make up for unemployment.”[4]
The twin shocks of 2016, the Brexit vote in June, and the election of Donald Trump in November, shook economists. Together, those events represented a rejection by millions of voters of economists’ claims to knowledge and expertise. Another prominent economist who does understand the risks for the economics fraternity in continuing to deny the reality of suffering caused by imports is Larry Summers. After serving as Secretary of the Treasury, and getting drummed out of the presidency of Harvard University, Summers today appears to care little for professional peer approval. In the summer of 2016, Summers offered this insightful analysis:
“The willingness of people to be intimidated by experts into supporting cosmopolitan outcomes appears for the moment to have been exhausted…What is needed is a responsible nationalism—an approach where it is understood that countries are expected to pursue their citizens’ economic welfare as a primary objective…International agreements would be judged not by how much is harmonized or by how many barriers are torn down but whether citizens are empowered.”[5]
There are a few of us economists—still all too few—working on what responsible nationalist economic policy would look like.
Footnotes:
[1] Autor, David, Dorn, David, and Hanson, Gordon, On the Persistence of the China Shock, NBER Working Paper 29401, October 2021, pg. 1.
[2] Ibid, pg 2.
[3] Aleem, Zeeshan, `Another Kick in the Teeth’: a top economist on how trade with China helped elect Trump, Vox, March 29, 2017.
[4] Swanson, Ana, In Washington, `Free Trade’ Is No Longer Gospel, New York Times, March 17, 2021.
[5] Summers, Larry, Voters deserve responsible nationalism not reflex globalism, Washington Post, July 10, 2016. Also available at www.larrysummers.com.
