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Trade with China hurts lower-skill U.S. workers

The dramatic rise of China has been one of the most talked about features of the phenomenon that we now call globalization. In the aftermath of the Cultural Revolution, China was a veritable “basket case.” In fact, when the prescient Deng Xiaoping became the leader of China in 1978, the Chinese economy was technologically backward, essentially closed and, as a result, had very limited trade interactions with the rest of the world.

Those early days in the late 1970s, which marked the beginning of a significant economic restructuring movement in China, now seem an eternity away because—at least in the economic arena—China has since done so much in so short a time period. For instance, it is now the third- largest producer of manufactured goods in the world. From 1990 to 2000, the share of world manufacturing exports originating in China increased from 2 percent to 5 percent. By 2007, this share had increased to 12 percent, and in 2011, the share was an enviable 16 percent. These numbers are dramatic, and they have had a positive impact on the lives of many Chinese workers and on the nation. However, in order to enjoy the benefits of this dramatic increase in exports, the Chinese have had to find willing buyers.

Enter the United States. As an open economy and an economic powerhouse with a significant manufacturing base of its own, the United States has been among the biggest importers of the plethora of manufactured goods exported by China. Therefore, we can certainly ask: What effect has this trade in manufactured goods with China had on American workers? In an opinion piece in the May 2 issue of this newspaper, I discussed one way of answering this question and this answer was based on research results documenting the deleterious impacts of increased trade with China on local labor markets in the U.S.

New research by the economists David Autor, David Dorn, Gordon Hansen and Jae Song has not only buttressed some of the findings discussed in the May 2 article but also, more interestingly, shed quantitative light on the plight of individual American workers exposed to increased trade in manufactured goods with China. The findings are sobering.

First, consider the impact on the earnings of American workers. Focusing on the 1992-2007 time period, these researchers show that American workers who were more exposed to trade with China show lower cumulative earnings and a higher receipt of Social Security Disability Insurance. To see the effect quantitatively, note that the difference between an American manufacturing worker at the 75th percentile of industry trade exposure and one at the 25th percentile of exposure equaled a decline in cumulative earnings of 46 percent of initial (1992) yearly income and to one-half of an extra month in which payments from SSDI were the primary source of income.

Second, these earning losses for American workers are not uniformly distributed across all workers. Instead, the earnings losses are larger for workers with low skills who typically have low initial wages, low initial tenure and low attachment to the labor force. In contrast, high-skill workers—who, unsurprisingly, also tend to have higher wages—have faced much smaller earnings losses.

Third, as far as job mobility in the face of adverse economic circumstances is concerned, low-wage workers “churn” or move about mainly between different manufacturing jobs where they are vulnerable to ongoing trade shocks resulting from increased trade in manufactures with China. In contrast, high-wage workers are much better able to move between alternate employers in manufacturing and even into jobs outside manufacturing. Therefore, this category of American workers is much better able to insulate itself from the adverse effects of shocks emanating from trade in manufactures with China.

To conclude, two points are worth emphasizing. The tangible losses borne by American workers as a result of trade in manufactures with China does not allow us to conclude that the net benefit of all trade to the United States is negative. Even so, policy makers need to recognize that the import shocks stemming from manufactures trade with China impose substantial labor adjustment costs on those American workers who are least equipped to deal with these costs.

Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology. These views are his own.

12/5/14 (c) 2014 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.

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