Towards a more informed view on what’s hidden under the veil of aggregated data
The current level of economic well-being is largely to be thanked to increased specialization in the economy, which was enabled by international trade and integration of regional and national markets. Although international trade is not a zero-sum game, even the most vocal proponents of openness to trade admit there are businesses finding themselves on the losing side of the bargain. Yet we know surprisingly little about the adverse effects of international trade exposure, especially on the micro level. David Autor, David Dorn, and Gordon Hanson made the first step into these unchartered lands and provide grounds for a more informed discussion about international trade.
Their great contribution stems from using regional instead of national data and also from distinguished use of econometric methods. Commuting zones in the US serve as a smart proxy of local labor markets. Labor mobility and spillovers from dynamic regions are often not able to compensate for losses caused by increased competition. Disaggregation of the data at the local labor market level enables a closer look at this issue. To avoid endogeneity, they use data on other advanced countries’ imports from China. The original US data could be endogenous; import intensity is not caused only by supply but by demand as well. However, by using import data of a similar country (actually a composite index of several ones), one can isolate only the supply effect and thus avoid the endogeneity trap.
The results prove Chinese import competition negatively affects labor markets. Even a brief look at the data shows clear negative correlation between manufacturing employment and Chinese import penetration in the US (see figure below). More advanced analysis shows import penetration indeed reduces the number of employees working in manufacturing, but also shrinks the total labor force (as many people prematurely retire or apply for disability benefits), pushes down wages in non-manufacturing, and increases government transfer receipts. Trade exposure thus affects the whole labor force: manufacturing through employment and non-manufacturing through wages. There is also already a mechanism in place compensating for losses caused by trade – unemployment, retirement, disability and other welfare benefits serve as an insurance against trade shocks. Unfortunately, looking at regions formerly known for booming manufacturing, such mechanism does not compensate for the contemporary economic dynamic.
Although trade with China most likely benefits the US economy in the aggregate terms, there are regions losing out in the short term. This could partly explain the widely spread disenchantment with new trade agreements all around the developed world (be it TPP or TTIP). However, for those working in the service sector in major cities, it is tempting to focus only on the upside of international trade. The newly acquired insights should not serve as an argument against openness to trade; instead, it should make the discussion more informed and make us all think of how to kick-start regions lagging behind.
Reference: Autor, D. H., Dorn, D., & Hanson, G. H. (2013). The China Syndrome: Local Labor Market Effects of Import Competition in the United States. American Economic Review, 103(6), 2121–2168. Available here.