6.10.16

THE MICROFOUNDATIONS OF TRADE POLICY.

The Economist offers an instructive essay on the political economy of trade agreements.  As with anything else in economics, it's the tradeoffs.  By all means read the whole thing (before the paywall closes) but let me highlight salient passages.
China’s accession to the [World Trade Organization] caused a big shock. The country’s size, and the speed at which it conquered rich-world markets for low-cost manufacturing, makes it unique. By 2013 it had captured one-fifth of all manufacturing exports worldwide, compared with a share of only 2% in 1991.

This coincided with a fresh decline in factory jobs in America. Between 1999 and 2011 America lost almost 6m manufacturing jobs in net terms. That may not be as dramatic as it sounds, since America is a large and dynamic place where around 5m jobs come and go every month. Still, when David Autor of the Massachusetts Institute of Technology (MIT), David Dorn of the University of Zurich and Gordon Hanson of the University of California, San Diego, looked into the job losses more closely, they found something worrying. At least one-fifth of the drop in factory jobs during that period was the direct result of competition from China.

Moreover, the American workers who had lost those jobs neither found new ones close by nor searched for work farther afield. They either swelled the ranks of the unemployed or, more often, left the workforce. That contradicts the widespread belief that America’s jobs market is fluid and flexible. When men lose a factory job, they often stay put. Those who managed to find new jobs were paid less than before and were working in industries that were vulnerable to competition from imports. In subsequent research, the authors found that lost factory jobs also had a depressing effect on aggregate demand (and thus non-manufacturing jobs) in the affected areas. In total, up to 2.4m jobs may have been lost, directly and indirectly, as a consequence of imports from China.
As the comparative advantage of the United States has traditionally been in knowledge-intensive, advanced technology goods, the change in manufacturing trade patterns ought come as no surprise, China being in a better place to do the routine production.  But the victory dividend after World War II left a lot of U.S. blue collar workers with less formal schooling in a bad place.
In 1964 male high-school graduates were about as likely to be in the workforce as college-educated men, but now only 83% of those with a high-school degree or less are in the workforce, against 94% of those who finished college (see chart). This mirrors a growing divergence in wages. In the mid-1960s the pay of less educated men averaged 80% of college-educated ones, but by 2014 that proportion had fallen to 60%.

It is unlikely that men are dropping out of work voluntarily. More than a third of inactive men live in poverty; less than a quarter have a working spouse. So the most obvious explanation is a fall in demand for less-skilled men. That in turn is partly linked to a long-term decline in manufacturing, whose share of the jobs market peaked in the days when almost all prime-age men worked. The CEA study found that states with a higher-than-average share of jobs in construction, mining and (to a lesser degree) manufacturing tend to have more prime-age men in the workforce. It does not help that men who lose their jobs are increasingly rooted in unemployment black spots.
For "unemployment black spots," think Rust Belt.  But trade effects and productivity effects have similar consequences for men with fewer years of school, something that in the U.S. is likely reinforced by the comparative advantage.
A steady drop in the share of prime-age men in the workforce going back half a century cannot be pinned on America signing free-trade agreements or China’s emergence as an exporter of manufactures, both of which happened fairly recently. Factory jobs peaked in the 1970s, but manufacturing output has continued to increase. Indeed, America’s share of world manufacturing output, on a value-added basis, has been fairly stable at a bit under a fifth for the past four decades. Thanks to advances in technology, fewer workers are needed to produce the same quantity of goods. But since trade with lower-cost countries and technological change have similar effects on labour-intensive production in the rich world, it is hard to disentangle their effects.
Thus doing trade policy is like doing any other trade policy in the form of a Marshallian improvement, where the movement to a larger opportunity set economy-wide leaves some people in a worse position.
Sober advocates of free trade know that over time the gains from it come from greater efficiency, not from more jobs, the number of which is largely determined by demography and the strength of aggregate demand. It is easier to spot the link between freer trade and factory closures than the more dispersed benefits trade brings to workers across other industries. Exporting firms in all countries and across a variety of industries are more productive, grow faster and pay higher wages than non-exporting firms. But a lot of the gains from trade come from the direct benefit of cheaper imports and their indirect effect on productivity.
Trade protection, however, makes the lot of the poorer people worse.  For example, think of all the cheap Chinese stuff on the shelves of Wal-Marts.  But nobody's talking about that in the current election cycle.

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