"Study Finds Free Trade With China Lowered American Manufacturing By 29.6 Percent"
Yesterday, The Washington Post’s Dylan Matthews reported that, according to a new paper, the 2000 normalization of trade relations between China and the United States left domestic manufacturing employment 29.6 percent lower that it would have been without the free trade policy:
PNTR did not actually involve much in the way of new tariff reductions, but what it did offer was certainty. It suggested that previously eliminated tariffs on Chinese goods weren’t coming back anytime soon.
That reassurance, Pierce and Schott argue, mattered a great deal. All told, they argue that employment in the manufacturing sector in the United States was 29.6 percent lower than it otherwise would have been absent PNTR. That means that employment in that sector would have grown — by close to 10 percent, Pierce and Schott estimate — as opposed to shrinking considerably, as it actually did. It presumably would have grown even more in the absent of other, non-PNTR liberalizations, such as China’s admission to the World Trade Organization. The effect was four times as strong for production-line workers as for non-production workers, which is in line with the usual finding that the losers from trade tend to be low-skilled workers in rich countries.
Interestingly, much of the negative effect on manufacturing employment came not from actual job losses but from the absence of job growth that would have been expected without the agreement.
This dovetails with a report from the Economic Policy Institute that the U.S. has lost 2.8 million jobs to China since 2001.
As Matthews points out, most economists agree that freer trade, in the long-run, is a net economic gain. Most obviously, the movement of manufacturing jobs overseas gives millions of poor people around the world the chance to better their economic condition. In turn, rising middle classes in other countries can provide new markets for American exports, thus boosting jobs here at home. And cheap manufactured goods from abroad help low-income Americans by providing goods at lower cost. As Matthews says, “It could still remain the case, as free-trade advocates argue, that it helped productivity and growth in the United States overall.”
The flip side is that manufacturing jobs going overseas moves America towards an “hourglass economy,” in which there are lots of low-income jobs, a decent amount of high-income jobs, but not much in the middle. There’s evidence that America’s growing inequality itself is a drag on economic growth, as well as an argument that keeping manufacturing, research and development geographically close to one another provides a more robust exchange of ideas and feedback in a product’s supply chain.
Finally, more domestic manufacturing means more exports and fewer imports, which means a lower trade deficit. Along with monetary policy and private savings, the trade deficit is part of the macroeconomic mix that effects federal budget deficits.