In 2000, the U.S. Congress granted Permanent Normal Trade Relations to China, and China joined the World Trade Organization. Over the next seven years, Chinese imports to the United States more than doubled, with notable increases in electronics, textiles, machinery, and furniture. During that period, manufacturing employment in the United States dropped sharply, and research has linked those job losses to increased imports from China.
But the job losses in manufacturing don’t tell the whole story. Ripple effects on other sectors—some of them positive—have received less attention.
While trade is generally thought to bring benefits, “those gains are not uniform,” says Lorenzo Caliendo, a professor of economics at Yale SOM. “Can we identify the losers and winners?”
In a study published recently in Econometrica, Caliendo and his collaborators investigated these indirect effects. The researchers found that while the China trade shock did depress manufacturing jobs in the United States, other sectors such as construction and services benefitted from access to labor and cheaper intermediate goods. Overall, U.S. welfare increased. But the gains took several years to materialize, and some regions were hit harder than others, highlighting the need for ways to ameliorate the transition.
“The bottom line is that our research finds uneven gains from trade,” Caliendo says. “This calls for the study of policies that are able to be more inclusive.”
Read the study: “Trade and Labor Market Dynamics: General Equilibrium Analysis of the China Trade Shock”
Caliendo worked with Maximiliano Dvorkin of the Federal Reserve Bank of St. Louis and Fernando Parro of Penn State University to model the processes involved in the trade shock. The model was guided by data on labor markets, trade, and production from sources such as the World Input-Output Database, the Commodity Flow Survey, and the U.S. Bureau of Economic Analysis.
The team then investigated the impact of the China trade shock—the fraction of American jobs in manufacturing, which have been declining for decades, that is due to China’s trade expansion and not to factors such as automation and the expansion of other sectors. In their empirical analysis, the researchers estimated that 550,000 of the 3.5 million manufacturing jobs lost from 2000 to 2007 were due to the shock.
But the share of jobs in services, construction, and wholesale and retail rose, likely for two reasons. The first was that people who were forced out of manufacturing turned to those sectors for work. The second was that those industries benefitted from buying cheap goods from China. For example, a clothing company might have obtained less expensive textiles.
Overall, the team estimates, American consumers’ purchasing power—which accounts for both changes in income and the prices of goods—rose by 0.2%. “At the end of the day, the China trade shock generated an improvement in average welfare for the U.S. economy,” Caliendo says.
But the development wasn’t uniformly positive. For one thing, benefits didn’t appear right away. “It takes time for the process of adjustment,” he says. Increases in services and construction jobs, for instance, took about a decade from the beginning of the shock to fully materialize.
And some regions were worse off than others. In absolute numbers, many manufacturing job losses occurred in California and Texas because they have large populations and substantial computer and electronics industries. But relative to the regional share of U.S. employees, states such as South Carolina, Mississippi, and Kentucky suffered the most because their economies rely heavily on manufacturing. “The impact of trade across regions is very heterogeneous,” Caliendo says.
The model did not include the entry or exit of firms from the U.S. economy. But Caliendo is now investigating the impact of the shock on those processes—for instance, whether foreign firms came to the U.S. or American firms added or removed offices across the country.
He also is analyzing the current trade war between the U.S. and China, which he says will likely have the opposite net effect as the 2000-07 trade shock. “While increasing tariffs might benefit some, on average we’re all going to be worse off,” he says.
Increased trade does bring overall gains, Caliendo says, but policymakers need to take action to spread the benefits more evenly across sectors, regions, and workers. “That’s the key, not to leave anyone behind,” he says.