Too Soon—Old;Too Late—Shmart

In his column at Bloomberg, Noah Smith notes that economists seem to be rethinking the advice they gave 20 years ago:

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 disagrees vehemently, 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 import competition…but offsetting employment gains in other industries have yet to materialize.

Autor, et al. show powerful evidence that industries and regions that have 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.

Let’s examine that a little more closely. First, we have never had a free trade agreement with China and I would be happy to bet that we never will have. We have had a system of trade in which the Chinese were largely free to trade here while they preserved their system of autarky over there. Call it “one-way autarky”. India does the same thing.

Second, I defy anyone to find in anything that the 19th century economist David Ricardo said or wrote that even suggested that managed trade brought the benefits he attributed to free trade in his On the Principles of Political Economy and Taxation in which he laid out the principles of comparative advantage.

Let me explain the remarks I made about my yardstick for trade agreements a tad more. Imagine that a trade agreement will result in $1 trillion of additional U. S. GDP and every penny of that $1 trillion will go to Warren Buffett while several million Americans lose their jobs. Should we approve such an agreement? Look at all of the increased GDP! I dare say that only Warren Buffett and, possibly, a few of the people to whose causes he contributes would vote for such a plan.

How about if the $1 trillion were to go to 10 people? How about 100 people? 1,000? 10,000? That’s almost precisely what we’ve done over the period of the last 30 years.

Doing business with China has always been a risky venture. It’s not, as you might have read in the opinion pages, a country with more than a billion prospective customers. To be a customer you must have the ability and desire to pay, called “willingness to pay” in the trade. Most Chinese don’t have that. China is a country with, probably, a couple of hundred thousand prospective customers.

I opposed granting China Most Favored Nation trading status. I opposed China being given permanent membership in the WTO. Don’t blame me.