Ian Fletcher

There’s a nice new academic paper just out by an MIT economist and his friends that gives some hard data to back up everyone’s suspicion that the U.S. is losing jobs to China. It’s entitled “The China Syndrome: Local Labor Market Effects of Import Competition in the United States,” by David Autor, and you can download it here if you’re curious.

The bottom line here probably won’t be all that surprising to most ordinary Americans, though it will annoy the living daylights out of most academic economists and our political establishment. In the authors’ own words,

Our study suggests that the rapid increase in U.S. imports of Chinese goods during the past two decades has had a substantial impact on employment and household incomes, benefits program enrollments, and transfer payments in local labor markets exposed to increased import competition. These effects extend far outside the manufacturing sector, and they imply substantial changes in worker and household welfare.

In ordinary language, we’re getting scr*wed, folks. “Welfare,” in this context, doesn’t mean welfare checks; it is the economists’ term for, roughly, “economic well-being.” And the “substantial changes” mentioned are not for the better.

One key discovery of this study is hard data to back up the idea, which I have personally argued for years, that free trade is not a small-government policy. In reality, free trade tends to expand government, by increasing the demand for social services and transfer payments (unemployment, welfare etc.) needed to mitigate its social costs. As the authors put it:

Growing import exposure spurs a substantial increase in transfer payments to individuals and households in the form of unemployment insurance benefits, disability benefits, income support payments, and in-kind medical benefits.

Quite. But don’t think the butcher’s bill is paid for by all this welfare-state generosity. The authors conclude that all this government assistance doesn’t cover the harm done by free trade:

Nevertheless, transfers fall far short of offsetting the large decline in average household incomes found in local labor markets that are most heavily exposed to China trade.

Now here’s the real kicker: the authors calculate that the economic efficiency lost due to increased transfer payments is quite likely big enough to cancel out all the supposed gains in economic efficiency due to trade with China!

Our estimates imply that the losses in economic efficiency from trade-induced increases in the usage of public benefits are, in the medium run, of the same order of magnitude as U.S. consumer gains from trade with China.

In other words, the blithe assumption of conventional economics that “Sure, free trade has its costs, but the benefits are infinitely larger” doesn’t hold up. We’re either not winning out, or winning only peanuts.

Finally, for any readers who have been smugly assuming that because they don’t personally work in manufacturing, none of this affects them, bad news. The authors report that,

Our analysis finds that exposure to Chinese import competition affects local labor markets along numerous margins beyond its impact on manufacturing employment. In particular, while growing exposure to Chinese imports reduces manufacturing employment in a local labor market, it also triggers a decline in wages that is primarily observed outside of the manufacturing sector. Reductions in both employment and wage levels lead to a steep drop in the average earnings of households. (Emphasis added.)

So don’t think there’s anywhere to hide from the China threat.

Make no mistake, people: the case for free trade is inexorably crumbling.

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Ian Fletcher is Senior Economist of the Coalition for a Prosperous America, a nationwide grass-roots organization dedicated to fixing America’s trade policies and comprising representatives from business, agriculture, and labor. He was previously Research Fellow at the U.S. Business and Industry Council, a Washington think tank founded in 1933 and before that, an economist in private practice serving mainly hedge funds and private equity firms. Educated at Columbia University and the University of Chicago, he lives in San Francisco. He is the author of Free Trade Doesn't Work, 2011 Edition: What Should Replace It and Why. | www.freetradedoesntwork.com