Free trade with China wasn’t a great idea for US

The Pak Banker - - OPINION - Noah Smith

IN his re­cent book "Eco­nom­ics Rules," Har­vard econ­o­mist Dani Ro­drik laments how econ­o­mists of­ten por­tray a pub­lic con­sen­sus while dis­agree­ing strongly in pri­vate. In ef­fect, econ­o­mists be­have like sci­en­tists be­hind closed doors, but as preach­ers when deal­ing with the pub­lic. Nowhere is this evan­ge­lism clearer than on the is­sue of trade. Ask any econ­o­mist what is­sue they agree on, and the first an­swer you're likely to hear is "free trade is good." The gen­eral pub­lic dis­agreesve­he­mently, but econ­o­mists are al­most unan­i­mous on this point. But look at ac­tual eco­nom­ics re­search, and you will find a very dif­fer­ent pic­ture. The most re­cent ex­am­ple is a pa­per by cel­e­brated la­bor econ­o­mists David Au­tor, David Dorn and Gor­don Han­son, ti­tled "The China Shock: Learn­ing from La­bor Mar­ket Ad­just­ment to Large Changes in Trade." The study shows that in­creased trade with China caused se­vere and per­ma­nent harm to many Amer­i­can work­ers:

Ad­just­ment in lo­cal la­bor mar­kets is re­mark­ably slow, with wages and la­bor-force par­tic­i­pa­tion rates re­main­ing de­pressed and un­em­ploy­ment rates re­main­ing el­e­vated for at least a full decade af­ter the China trade shock com­mences. Ex­posed work­ers ex­pe­ri­ence greater job churn­ing and re­duced life­time in­come. At the na­tional level, em­ploy­ment has fallen in U.S. in­dus­tries more ex­posed to been more ex­posed to Chi­nese im­port com­pe­ti­tion since 2000 -- the year China joined the World Trade Or­ga­ni­za­tion -- have been hit hard and have not re­cov­ered. Work­ers in th­ese in­dus­tries and re­gions don't go on to bet­ter jobs, or even sim­i­lar jobs in dif­fer­ent in­dus­tries. In­stead, they shuf­fle from low-paid job to low-paid job, never re­cov­er­ing the pros­per­ity they had be­fore Chi­nese com­pe­ti­tion hit. Many of them end up on wel­fare. This is very dif­fer­ent from ear­lier decades, when work­ers who lost their jobs to im­port com­pe­ti­tion usu­ally went into higher-pro­duc­tiv­ity in­dus­tries, to the ben­e­fit of al­most ev­ery­one.

In other words, the pub­lic might have been wrong about free trade in the 1980s and 1990s, but things have changed. Pop­u­lar opin­ion seems to be ex­actly right about the ef­fect of trade with China -- it has killed jobs and dam­aged the lives of many, many Amer­i­cans. Econ­o­mists may blithely de­clare that free trade is won­der­ful, but our best re­searchers have now shown that pub­lic mis­giv­ings about th­ese smooth as­sur­ances have been com­pletely jus­ti­fied.

Why are econ­o­mists so will­ing to de­clare to the world that free trade is good, even af­ter read­ing pa­pers like the one by Au­tor et al.? Part of the prob­lem is the def­i­ni­tion of "good." Ac­cord­ing to most mod­els of trade, re­duc­ing trade bar­ri­ers raises ef­fi­ciency -which is to say, to­tal gross do­mes­tic prod­uct. But ef­fi­ciency says noth­ing about fair­ness, and al­most any model of trade will show that some peo­ple, in­dus­tries and re­gions lose out. If most Amer­i­cans ex­pe­ri­ence slight gains from lower im­port prices, and a few lose their liveli­hoods and have to go on wel­fare, econ­o­mists call that a "good" out­come, be­cause they are so fo­cused on the con­cept of ef­fi­ciency. But be­cause the pub­lic cares about a lot more than ef­fi­ciency, the job losses in in­dus­tries and re­gions knocked out by China since 2000 have made econ­o­mists seem in­creas­ingly cal­lous and out of touch.

But this is only part of the prob­lem. Econ­o­mists are also stub­bornly un­will­ing to ques­tion their bench­mark the­o­ries, even when the ev­i­dence presents a chal­lenge to th­ese the­o­ries. The fact that Au­tor et al. find to­tal na­tional em­ploy­ment de­clin­ing in re­sponse to trade with China should be cause for con­cern. Stan­dard trade mod­els, es­pe­cially the sim­ple ones taught in Econ 101, pre­dict that this shouldn't have hap­pened. Au­tor et al. sternly re­buke the eco­nom­ics pro­fes­sion for re­ly­ing too much on the­ory, and not enough on ev­i­dence, when it comes to the is­sue of trade: We ar­gue that hav­ing failed to an­tic­i­pate how sig­nif­i­cant the dis­lo­ca­tions from trade might be, it is in­cum­bent on the eco­nom­ics lit­er­a­ture to more con­vinc­ingly es­ti­mate gains from trade, such that the case for free trade is not based on the­ory alone, but on a foun­da­tion of ev­i­dence.

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