Gordon Hanson on trade with China

Gordon Hanson holds the Pacific Economic Cooperation Chair in International Economic Relations at UC San Diego, and has faculty positions in the Department of Economics and GPS, where he also is director of the Center on Global Transformation. He is former acting dean of the School and is presently a research associate at the National Bureau of Economic Research, a member of the Council on Foreign Relations and co-editor of the Journal of Economic Perspectives. He is a past co-editor of the Review of Economics and Statistics and the Journal of Development Economics.

Hanson received his Ph.D. from the Massachusetts Institute of Technology in 1992 and his B.A. from Occidental College in 1986. Prior to joining UC San Diego in 2001, he served on the economics faculty of the University of Michigan and the University of Texas. Hanson specializes in the economics of international trade, international migration and foreign direct investment. He has published extensively in the top academic journals of the economics discipline, is widely cited for his research by scholars from across the social sciences and is frequently quoted in major media outlets. Hanson’s current research addresses how trade with China has affected the U.S. labor market, the consequences of skilled immigration for the U.S. economy and the long-run determinants of comparative advantage. He spoke to Isabella Speciale, International Journalism Fellow CMC ‘17​ on March 11, 2016.

Could you please tell our readers briefly why you were motivated to study this relationship between trade with China and the U.S. job market and publish your report: “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade.” 

I’ve been studying the impact of globalization on labor markets for over 20 years now; it was one of the first topics I started to do research on after completing my dissertation. My initial work focused on the U.S.-Mexico economic relationship and, in that era, it was hard to get economists to believe that trade was that big of a deal for the U.S. labor market because everyone thought that technological change was by far and away the most important factor changing the U.S. wage structure, employment patterns, and so forth. There was popular discussion about the NAFTA and its impact, but the consensus among economists was that trade was just not that big of a deal. So it was an issue I kept my eye on very closely, and as China’s economy really started to take off it seemed like a great opportunity to really try and understand the way in which economies integrate through global markets and what that means for labor markets in the U.S. and abroad. So I was waiting for this story to emerge and for us to accumulate enough data and for there to have been enough time to try and revisit the issue of those impacts. The “China Shock” paper is a synthesis paper; David Dorn, David Autor and I – my two co-authors on the paper – have been working on China’s impact on the U.S. for five or six years now and that work has really been targeted for a narrower academic audience. And this paper synthesizes the research that we have to date to try and communicate in less technical terms what we’ve found about China’s impact on the U.S. 

How does the main finding in your report differ from what would have been historically assumed about international trade and the domestic job market? 

By the end of the 1990’s, the consensus amongst economists was that the most important factor driving change in U.S. labor markets was technological innovation, and trade and immigration would be third or fourth on the list after changes in the U.S. labor market, changes in minimum wage and so forth. So when China came on and grew so fast, realizing a latent potential which had been bottled up for decades if not centuries, it raised the question ‘what happens to labor markets when we do get a big change in who the participants are in world markets?’ Our analysis of China and its tremendous growth was tackling the question in a new way. Technological change may have been the primary driver in the 80’s and into the early 90’s, but when China came along, globalization became equal if not a more important part of the story. There’s now broad appreciation for the fact that trade with the rest of the world and in particular with developing countries is having profound impacts on the U.S. labor market. 

Figure 1: China’s Share of World Manufacturing Activity, 1990-2012
Since 1990, China’s share of world manufacturing (value added) has risen around 20%, while China’s share of world manufacturing (exports) has risen around 15%. By 2015, China’s share was approximately one quarter of all world manufacturing (value added). 
Screenshot and title taken from “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade.” http://www.nber.org/papers/w21906.pdf ; original source: World Development Indicators

Why do you think your report has received enormous attention? Has there been any notable backlash against your findings? 

The backlash, interestingly enough, has come most intensely from economists who have an abiding belief to the benefits of trade for the global economy. They worry that our results give trade a bad name and provide intellectual cover for people who want to promote protectionism. And our response to that is that we’ve known for a long time that globalization creates winners and losers. The U.S. was able to live in a world where we could ignore that fact for much of the post- World War II era, because during that time, much of our trade was primarily with other rich countries – with Canada and Western Europe. And much of the developing world had sealed off their markets; they were focusing on serving domestic markets and industrialization, or were just hidden behind the walls created by the cold war. So our story was, if we as economists want to talk about the benefits of trade we also need to be very clear about what the costs are and what policies need to be enacted in parallel with opening markets to trade and investment if we want there to be broader popular acceptance. So that was the backlash from the side of economists. The response from the popular audience has been a lot of people saying, ‘duh! We’ve known this for a long time, you economists are just figuring it out now.’ Which may in part be true, but what we bring to the table is careful, agonizingly careful, statistical analysis that tells us exactly what the magnitude are. But we are mindful of the delicate moment the U.S. economy is in right now, and the importance of providing nuance in our understanding of trade’s impact, because if you let people tell purely a negative line you get Donald Trump-like reactions to the U.S. participation in the global market. 

What was your hypothesis or guiding question when you began the process of producing this report for the National Bureau of Economic Research? 

My expectation going in was that we were going to find a significant impact of China’s export growth on the U.S. market that has contributed to the decline of manufacturing. You look at how quickly China was growing based on the evidence I looked at from the 70’s and 80’s to early 90’s, and all of my instincts said the effects are going to be there. So part of what we wanted to do was make sure we were very careful about getting the answer right. What we were not expecting to see was the fact that these impacts of China’s growth have hit some regional economies much harder than other regional economies, so there are very uneven impacts of the China shock on the U.S. And we also were surprised by the fact that regions have done such a poor job adjusting to this shock. Our understanding going in was when your regional economy, say the furniture producing regions of Tennessee or North Carolina, face a decline in business, what happens is workers lose their jobs, plants close down, many of those workers will just pack up and move to where the jobs are. Economists had a strong prior belief that U.S. labor markets are very flexible, and workers are very mobile in response to changing economic conditions. The surprising thing to us was how little mobility we were seeing. Regions that got hit saw declines in employment, so workers lose their jobs, and say very little out migration, so workers staying in depressed labor markets for a long time. That really came as a surprise to us and to lots of other people too. A consequence of that regional stagnation was lots of those individuals taking up government benefits as a way of adjusting to that new reality. That also really came as a surprise; many people thought that in the era after the big welfare reform that President Clinton pushed through in 1996, social policy just doesn’t matter as much for how workers adjust to downturns in regional economic activity because the social safety net is just not that strong anymore. But we found that it’s still there, and, in fact, workers are finding ways to use existing programs to perverse effects on the overall health of the economy. Another thing is that we were quite interested in looking at how existing social programs and labor policies that were designed to help workers adjust to the negative impacts of international trade were working. And another surprising thing we found were that those policies are almost irrelevant for U.S. labor market adjustments. They are working in the fact that workers are taking up these trade adjust benefits when they lose their jobs as a result of trade, but it effects a tiny fraction of the segment of the labor market that is negatively impacted. So, while the policy works in the sense of being responsive, it doesn’t work in the sense that it just benefits very few people. The programs are just way too small to matter.

Has the information in this report influenced anything in the political or economic sphere?

We think so. One of my collaborators, David Autor presented his research to President Obama himself in the Oval Office. We have talked to several chairs on the President’s Council on Economic Advisors, and advising them on how to think about the impacts of trade. We know they have been avid consumers of our work. Our work has been cited a lot in the editorial discussion of trade policy, so we feel like we have been able to put our work out into the public sphere and get it discussed. What happens after that is not in our control, so we hope people use this information in a responsible way. 

Figure 2: Manufacturing Share of U.S. Nonfarm Employment; sourced from “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade”
From 1940 to 2015, the ratio of all employees in manufacturing to all nonfarm employees declined from about 0.39 in 1943 to about 0.9 in 2010, demonstrating a decline in manufacturing employment nationally. 
US. Bureau of Labor Statistics, All Employees: Manufacturing [MANEMP], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/MANEMP, March 22, 2016.

In what ways do you think the 2016 presidential campaign reflects the anxiety of America’s working class that has seen many of its jobs shipped overseas due to globalization? 

Trade has become one of the touchstone issues in this election, and that has come as a surprise to a lot of people because the U.S. economy has recovered from the Great Recession that started almost nine years ago. But I think what many analysts did not appreciate is that the recovery has been very uneven and so in regions that were hard hit by the Great Recession, which came on top of two decades of rising import competition from China, the causes of economic pain in those parts of the country are very fresh in people’s minds. It took politicians a while to clue into that fact and for it to surge to the forefront and become a dominant issue in the campaign. So it took us a while to get here, because the impact of trade on the U.S. labor market has been there for a decade, a decade and a half. But it is the accumulation of those impacts without relief, without recovery in the hardest hit areas that has made this a raw point for the electorate and therefore an issue that politicians are going to try and exploit.  

Do you believe that there are any real solution to the damaging effects trade with China has on the U.S. job market? Donald Trump suggests imposing major tariffs on imported goods from China – is something like this a realistic solution or an effective method for bringing jobs back to America?

Not at all – Donald Trump would be a disaster for U.S. economic policy. The U.S. benefits enormously from our integration into the rest of the world. You think about the success of the U.S. high-tech center, of U.S. finance, of U.S. consulting and accounting firms, and our ability to be the global leader in innovation depends on us having access to global markets where we can sell our goods and services and where we can also obtain imported raw materials at the lowest cost. So Trump’s response is a response of an opportunist who is looking for a quick way to find political gain from people’s current anxieties. The solutions unfortunately are ones that will take a while to have an impact. We are reaping the rewards of having been poorly prepared for the consequences of globalization on the U.S. labor market. We didn’t have policies in place that allowed workers to smoothly move between jobs or between regions in response to changing economic conditions, and indeed we put policies in place that impeded that mobility. So we now have a generation of workers that have suffered the effects of those poorly designed policies, and there’s no quick fix. Helping regions that have been in decline recover is slow going. We can do better for the next generation of workers, and the unexpected changes that will ripple through the global markets. But this involves better-designed education policies so that we’re training workers for the jobs that exist rather than the jobs that we might want to exist. It involves removing distortions in the ways labor markets work, things like social security and disability insurance, or the poor design of our unemployment insurance which gives workers an incentive to stay out of work because that’s the only way they keep receiving benefits. On the contrary, we want to be subsidizing employers for hiring unemployed workers during a transition period so that they don’t spend large amounts of time outside of the labor force, which is incredibly damaging for their future, long-run prospects. So there are measures on the table we can undertake, they’re going to effect things slowly and they are not going to bring immediate relief to the regions that have been the hardest hit. Those who suggest you can quickly and immediately bring manufacturing jobs back to the United States are snake oil salesmen – that’s just not the economic reality. 

This report highlights the serious challenges trade with China is causing for lower-skilled American workers – what is the future job market looking like for those workers if trade with China continues to be as strong as it has been?

China has done a lot of its damage already – there are many labor-intensive parts of U.S. manufacturing that are gone. The footwear industry, textiles, parts of paper and packaging, those jobs have disappeared and they’re not going to come back. If they don't, they might not stay in China, they might go on to Vietnam or Bangladesh or somewhere else, but our capacity to bring large numbers of those jobs home is quite limited. Now, helping train workers who are in school now or not too long past school for the new global environment, giving them vocational skills and enacting policies that help them move quickly between jobs early in their careers, which is such an important time for your long-run development, those are actions that we can take that would improve the long run prospects for those workers. So there’s some promise there – if you’re in your early 20’s or early 30’s you’ve got opportunities to adjust. The situation for people who are in their early 50’s is much more difficult, it is very hard to reabsorb those workers who have had manufacturing jobs for 20-25 years into other sectors of the economy that will offer them anywhere near the compensation they were earning before. I think that as economists when we talk about the benefits of trade, these are benefits that exist in an aggregate sense. If we want to make sure that an economy gains on net, there must be transfers from winners to losers. For workers exposed to adverse impacts of trade, a responsible social policy would pad their income using the earned income tax credit or other positive incentive programs that supplement income, while still providing incentives to remain engaged in the labor force. But I don’t want to paint a rosy picture there; those workers are in a tough spot. And it’s hard to be too optimistic about what future prospects hold for them.  

Isabella Speciale CMC '17International Journalism Fellow
Featured image source: By Hermann Luyken (Own work) [CC0], via Wikimedia Commons
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