Brief Note on ‘The China Syndrome’

by Reihan Salam

In May of this year, David Autor, David Dorn, and Gordon Hanson released a new version of a provocative working paper on the impact of Chinese import competition on local labor markets. The following is drawn from the abstract:

Rising exposure increases unemployment, lowers labor force participation, and reduces wages in local labor markets. Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment. Transfer benefits payments for unemployment, disability, retirement, and health care also rise sharply in exposed labor markets.

The paper makes an effort to isolate the impact of Chinese import competition on various regions, and it relies on the assumption that labor market mobility has a relatively limited impact in the short- to medium-term. It finds that commuting zones (“CZs”) that were heavily impacted by a sharp increase in Chinese import competition experienced steeper decreases in employment and wage levels than those that were lightly impacted.

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 outsideof the manufacturing sector. Reductions in both employment and wage levels lead to a steep drop in the average earnings of households. These changes contribute to rising transfer payments through multiple federal and state programs, revealing an important margin of adjustment to trade that the literature has largely overlooked. Comparing two CZs at the 75th and 25th percentiles of rising Chinese trade exposure over the period of 2000 through 2007, we find a differential increase in transfer payments of about $63 per capita in the more exposed CZ. The largest transfer increases are for federal disability, retirement and in-kind medical payments. Unemployment insurance and income assistance play a significant but secondary role. By contrast, Trade Adjustment Assistance (TAA), which specifically provides benefits to workers who have been displaced by trade shocks,accounts for a negligible part of the trade-induced increase in transfers.

Theory suggests that trade with China yields aggregate gains for the U.S. economy. Our study highlights the distributional consequences of trade and the medium-run efficiency losses associated with adjustment to trade shocks. The consequences of China trade for U.S. employment, household income, and government benefit programs may help account for the apparent public ambivalence toward globalization and specific anxiety about increasing trade with China. [Emphasis added]

To their credit, the authors are very cautious about the claims they are advancing. It is worth noting, however, that their estimates of the deadweight loss associated with transfer programs are high:

One manner in which adjustment to import competition may partly offset gains from trade is through the deadweight loss associated with individual take-up of government transfers. Such a loss is not a distributional consequence of trade but a reduction in economic efficiency associated with U.S. benefit programs. The coefficient estimate in column 1 of Table 8 implies that annual per capita transfers increase by $58 for every $1,000 of additional import exposure per worker. By multiplying this coefficient by the observed growth of exposure to Chinese imports and the fraction of this growth that we attribute to supply shocks, we obtain that rising import competition fromChina has been associated with an increase in annual transfers receipts of $32 and $51 per capita in 1990-2000 and 2000-2007, respectively. Using Gruber’s (2010) estimate that the marginal excess burden of taxation (required to fund transfers) is equal approximately to 40 cents on the dollar, the increase in transfers resulting from import exposure implies an increase in annual deadweight lossof $13 and $21 in these two periods, or $33 in total. Applying a confidence interval of plus and minus one standard error around the point estimate for induced transfers, we estimate the range of deadweight losses at $22 to $44 per capita.

If the deadweight cost of raising public funds is as high as Autor et al. suggest, the most popular strategy for mitigating the economic dislocation caused by import competition — increasing employment subsidies, etc. — will actually backfire. So it seems that the improving the efficiency of the tax system, by moving to from progressive income taxes to relatively flat consumption taxes, for example, is actually an important part of how advanced market democracies should respond to higher trade intensity.