Who Benefits From Trade?

A new study published last month in The Quarterly Journal of Economics attempts to answer that question. Their results?:

We find a pro-poor bias of trade in every country. On average, the real income loss from closing off trade is 63% at the 10th percentile of the income distribution and 28% for the 90th percentile. This bias in the gains from trade toward poor consumers hinges on the fact that these consumers spend relatively more on sectors that are more traded, whereas high-income individuals consume relatively more services, which are among the least traded sectors. Additionally, low-income consumers happen to concentrate spending on sectors with a lower elasticity of substitution across source countries. Larger expenditures in more tradeable sectors and a lower rate of substitution between imports and domestic goods lead to larger gains from trade for the poor than the rich (pgs. 1116-1117).

From the authors’ Vox article.

Previous studies have found net benefits to average Americans. For example, according to a 2005 study,

Estimated annual gains are on the order of $1 trillion. The estimated gain in 2003 income is in the range of $2,800 to $5,000 additional income for the average person and between $7,100 and $12,900 for the average household. Future gains are harder to quantify, not surprisingly since the future is always difficult to predict. The estimates range from $450 billion to $1.3 trillion (pg. 68).

While some recent studies (such as Autor et al. 2016) have looked at the job loss caused by trade, some economists have expressed skepticism and even confusion over the claims and models used. An article in the NBER Reporter earlier this year summarizes the debate:

The rise in exports from China has been one of the most significant events in international trade in recent decades. This trend has accelerated since that country’s entry into the World Trade Organization (WTO) in 2001. Even before that date, by a vote of the U.S. Congress China received the low-tariff, most-favored-nation status associated with WTO membership each year. But with WTO membership, Chinese firms experienced a reduction in the uncertainty associated with the outcome of that vote. This contributed importantly to the surge in exports to the United States, according to studies by Justin Pierce and Peter Schott and by Kyle Handley and Nuno Limão; their hypothesis is supported by empirical work by Ling Feng, Zhiyuan Li, and Deborah Swenson. Pierce and Schott observe that the surge in Chinese exports to the United States coincides with a substantial decline in U.S. manufacturing employment. Handley and Limão find that the welfare gain for consumers due to this increase in Chinese imports is of the same order of magnitude as the U.S. gain from new imports in the preceding decade. These initial findings highlight the dual role that Chinese imports play for the United States: on the one hand, they create import competition with associated labor-market dislocation; on the other, they benefit U.S. consumers.

The first of these roles is explored in a series of papers by David Autor, David Dorn, and Gordon Hanson. They analyze the impact of Chinese import competition between 1990 and 2007 on local U.S. labor markets, exploiting geographic differences in import exposure that are due to initial differences in industry specialization. Higher exposure increases unemployment, lowers labor force participation, and reduces wages…At the aggregate level, a conservative estimate is that the import surge accounts for one-quarter of the decline in U.S. manufacturing employment. The regional concentration in the decline in manufacturing employment is inconsistent with some alternative explanations of this phenomenon, notably the possibility of a systemic technology shock. The trade effects on unemployment are confirmed by examining worker-level evidence. Most recently, in joint work with Daron Acemoglu and Brendan Price, these authors find that the import surge from China also contributed to unusually slow employment growth in the United States following the global financial crisis and the Great Recession.

While these papers have explored the impact of import competition from China, they do not incorporate the consumer gains or the export opportunities created by expanded Chinese exports. The first attempt to put the surge in Chinese exports into a general equilibrium context is that of Lorenzo Caliendo, Maximiliano Dvorkin, and Fernando Parro. Their computable general equilibrium model incorporates labor mobility frictions and dislocation costs. They find that growing Chinese import competition resulted in a 0.6 percentage point reduction in manufacturing’s share of total employment, or approximately one million jobs lost, which is about 60 percent of the change in manufacturing employment not explained by a secular trend. At the same time, the China shock increased U.S. welfare by 0.2 percent in the short run and 6.7 percent in the long run, with very heterogeneous effects across labor markets. Despite the fact that employment impacts and labor market dislocation are much stronger in some areas, the consumer gains and export opportunities mean that nearly all regions experience net benefits from rising Chinese imports.

While there may be certain steps we can take to diminish the temporary blow to some American workers, we should not lose sight of the fact that trade is a net benefit to Americans and particularly the poor.