Panglossian trade theory facing reality

26 May, 2016 at 08:36 | Posted in Economics | 4 Comments

ripI feel a little like Rip Van-Winkle. The consensus amongst economists in the 1980s was that trade is always and everywhere good for everyone. After attending a UCLA workshop on trade a couple of weeks ago, I learned that all that has changed. There is a new consensus, summarized in two papers, “The China Syndrome”, published in the American Economic Review, and “the China Shock”, a new working paper, by David Autor, David Dorn and Gordon Hanson (ADH). According to their research, the effects of trade with China have been truly catastrophic for the average American worker. Over to ADH —

“Our analysis finds that exposure to Chinese import competition affects local labor markets not just through manufacturing employment, which unsurprisingly is adversely affected, but also along numerous other margins. Import shocks trigger a decline in wages that is primarily observed outside of the manufacturing sector.”

Sound familiar? This is a case of academic economists catching up with what the median blue-collar worker has known for a long time. The U.S. lost jobs to China and the average American worker was not compensated by the winners. And there were winners.

“China’s economic growth has lifted hundreds of millions of individuals out of poverty. The resulting positive impacts on the material well-being of Chinese citizens are abundantly evident. Beijing’s seven ring roads, Shanghai’s sparkling skyline, and Guangzhou’s multitude of export factories none of which existed in 1980 are testimony to China’s success.”

Nor were the winners only Chinese workers. If your income is primarily generated by ownership of human or physical capital; you have benefited enormously from the chance to combine your talents, in the case of human capital, and your wealth, in the case of physical capital, with a vast pool of unskilled labor. But those benefits were never passed on to American workers and American workers are now voicing their collective displeasure at the ballot box.

Roger Farmer



  1. Dear Roger (Rip Van-Winkle) Farmer, This phenomenon occurs whenever the problem of competition between a home and a foreign based industry comes up. In China the production costs are far cheaper due to the almost slave-labor, but the transport costs to the (foreign) consumer are more. The answer should be for short-term home change to a different product, and for long-term when the Chinese workers get properly paid and the competition becomes fair. Trade wars by tariff barriers are not a good idea and in the past caused hot war.

    • Nobody is advocating a return to autarky. It is just that late in the game economists are starting to realise what historians and other non-economists have known for some time, that deep trade liberalisation does not lift all boats, and can be tied to the hollowing out of domestic production structures which are not replaced and where winners do not compensate or cannot adequately compensate losers.

  2. You make sound as if all American workers are affected instead of particular sectors and corporations. How can this be?

  3. “You make sound as if all American workers are affected instead of particular sectors and corporations. How can this be?”

    Income effects on top of relative price effects.

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