Study: China Trade Did More Damage To US Economy Than Anyone Knew

Workers have said all along that U.S. trade policies were killing American jobs, and now the research is finally catching up to them. Maybe we'll be smart enough to drop the three Bush trade agreements Obama is currently trying to push: For

Workers have said all along that U.S. trade policies were killing American jobs, and now the research is finally catching up to them. Maybe we'll be smart enough to drop the three Bush trade agreements Obama is currently trying to push:

For years, economists have told Americans worried that cheap Chinese imports will kill jobs that the benefits of trade with China far outweigh its costs.

But new research suggests the damage to the U.S. has been deeper than these economists have supposed. The study, conducted by a team of three economists, doesn't challenge the traditional view that trade is ultimately good for the economy. Workers who lose jobs do eventually find new work or retire, while the benefits from trade, such as lower prices, remain. The problem is the speed at which China has surged as an exporter—overwhelming the normal process of adaptation.

The study rated every U.S. county for their manufacturers' exposure to competition from China, and found that regions most exposed to China tended not only to lose more manufacturing jobs, but also to see overall employment decline. Areas with higher exposure also had larger increases in workers receiving unemployment insurance, food stamps and disability payments.

The authors calculate that the cost to the economy from the increased government payments amounts to one- to two-thirds of the gains from trade with China. In other words, a big portion of the ways trade with China has helped the U.S.—such as by providing inexpensive Chinese goods to consumers—has been wiped out. And that estimate doesn't include any economic losses experienced by people who lost their jobs.

The theory of comparative advantage, framed two centuries ago by British economist David Ricardo, says nations prosper by focusing on what they do best and trading with other countries that have different strengths. But amid the surge in inexpensive imports over the past decade, some prominent economists have challenged that view.

In a 2004 article, the late Nobel Laureate Paul Samuelson argued that while trade may benefit some Americans, it does so by "decimating" the wages of blue-collar factory workers. Princeton University economist and former Federal Reserve Board vice chairman Alan Blinder—once a champion of free trade—in recent years has argued that U.S. firms' increased outsourcing to low-wage countries puts millions of American jobs at risk.

Michael Spence, a Nobel Laureate economist at New York University, said the new finding reflects how prevailing theories of trade aren't up to the task of dealing with the breakneck pace of China and other developing economies. Since the world has never seen such large countries grow so quickly, history isn't much of a guide. "It's not like we can look to the past and ask ourselves what happened last time this happened, because there wasn't a last time," he said.

Because the surge in goods from China has swamped import growth from other low-wage countries, the researchers focused on Chinese imports. They studied 722 clusters of interrelated counties covering the entire U.S. Some communities were more exposed to China, because they produced goods such as small appliances where Chinese imports have surged. Other regions were concentrated in industries like heavy machinery where Chinese competition has been slower to build.

A pattern emerged, with areas where factories were most exposed to Chinese import growth faring worse than the less exposed. Between 2000 and 2007, a community at the 75th percentile—one with a greater exposure to Chinese import growth than 75% of all communities—saw a manufacturing employment decline of roughly one-third more than communities at the 25th percentile.

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