Al Stamborski: Welcome to Timely Topics. I’m Al Stamborski, your host for this podcast. With me today is Max Dvorkin, an economist in the research division at the Federal Reserve Bank of Saint Louis. We are going to be talking about Max’s research on the impact of Chinese imports on U.S. jobs, specifically jobs in manufacturing.
AS: Max, before we talk about your research, remind us what the standard view of trade is among economists.
MD: Sure. So in theory, trade is good. Now, in practice, there’s a big debate on whether importing foreign goods hurts the domestic economy, and in particular the labor market. The impact depends on whether foreign goods compete or complement local production and whether it’s easy for factors of production like labor to reallocate to more productive sectors.
MD: Yes. I believe that overall, international trade is beneficial. However, I also recognize that the gains from trade may not be evenly distributed and that some workers may actually end up worse off.
AS: OK. Let’s back up just for a second, Max. Tell us what motivated you to study these trade issues in the first place.
MD: Well, I’m drawn to this subject because there are many important and exciting questions to answer. For example, who benefits from trade? Who loses? Are there gains or losses in the short run or in the long run? And what should we do about it? How we assign policies to compensate those that suffer because of increased international trade.
MD: I studied the impact of the surge of imports from China between 2000 and 2007 on different U.S. labor markets, in particular how workers in different sectors, like manufacturing or services, and in different regions in the United States were affected by these large increases in trade with China.
MD: Yeah, that’s a good question. So several factors shape the choice of that time period. So on the one hand, between 2000 and 2007 the volume of imports from China into the U.S. grew dramatically. During this period, China surpassed Canada as the main trade partner of the U.S. in terms of imports, for example. Also late in 2001, China joined the World Trade Organization, which some economists coined as an important and a main driver of increased international trade by China with the U.S. and also with the rest of the world. And, finally, we face some data limitations because some of the data that we use in our study is not available for years before 2000.
AS: OK. In your full-fledged research paper on this topic, you refer to this period as a shock to the U.S. You call it the Chinese shock. Am I getting that correct? Is that how you refer to it?
MD: Well, we find that approximately 800,000 manufacturing jobs on net were lost because of the increased Chinese competition between the years 2000 and 2007. This is an important number and represents a sizable fraction of the more than 3 million manufacturing jobs that were lost in that same period. Most of the manufacturing jobs that were lost were in the production of computer and electronic goods, primary and fabricated metal products, furniture and textiles.
AS: OK. So why did these Chinese goods beat out the American-made versions of them? Was it they were of higher quality, or cheaper or the Chinese could deliver faster?
MD: Well, within the context of our model, it’s cheaper, it’s lower prices. China is able to produce some of these goods at a much cheaper cost.
AS: Earlier you mentioned that part of your research had to do with figuring out in which parts of the country most of these jobs were lost. So, did you find that there was a concentration in, you know, one part of the country or, you know, a particular group of states? Or in the end, did it turn out to be sort of uniformly affecting the whole country?
MD: Yes. That’s a good question. So, clearly, the most populated states, the larger states, experienced a larger manufacturing job loss. However, size, you know, here is blurring things, so, if we control for size what we show or what we find is that states with a large share of manufacturing jobs, like for example Ohio, experienced a larger than average loss, while other states, like Florida that have a smaller share of manufacturing employment, were clearly less affected.
AS: OK. When I first heard about this research, you know, I saw the number 800,000 manufacturing jobs in the U.S. lost over a seven-year period, I thought, “Oh my gosh, you know, that’s a huge toll for the U.S. to absorb and that, you know, this was all bad news.” But then your paper also makes the point that, you know, at the same time this led to job creation in the United States. So can you tell us about that?
MD: Yes. So clearly, we do not want to have a negative position with our study. Actually, we find that in many sectors and in many areas of the U.S., jobs were created, thousands of jobs were created. In particular, for example, in construction wholesale and retail trade and services. And also within manufacturing we find that there were small gains in employment in the production of food and beverages and tobacco products. So, the reason is that these sectors were not very exposed to the competition from China and actually benefited from having access to cheaper intermediate inputs, and that then, in turn, they use in their own production processes.
MD: Yes. These are, for example, steel that you will use in the construction of houses or the production of cars. And also, you know, computers and telephones that you will use, for example, in the financial sector or in education.
AS: Wait, Max, explain to me how it is that when these other U.S. manufacturers and other companies can buy cheaper goods from China, how does that translate into more jobs in those industries in this country?
MD: Well, because these goods have a lower cost, the cost of production goes down. This increases profits, and many companies with this increasing profits want to actually expand production. That means hiring more labor as well.
AS: So do you have numbers on the jobs that were created in the U.S. because of these Chinese imports?
MD: Yes. Within the context of our model, we see very little effect on nonemployment. So that means that a similar number of jobs were created in these other sectors.
AS: OK. I got it. Well, going beyond that, I mean, not only does it say in your working paper, in your research paper, that jobs were also created during the same time period, but you actually found that there was a net gain to the US economy because of these Chinese imports. Is that correct?
MD: Yes. On top of these jobs that were created, there’s an additional effect in terms of, you know, consumption. So, for example, because U.S. firms are able to lower their production cost and also because consumers in the U.S. are able to consume these U.S. goods at a lower price and some of the Chinese goods at a lower price, then we are able to put a number on the gains to consumer. Which in fact, we compute as an extra $260 of spending, extra spending, per year for the rest of their lives.
AS: So you computed that every person in America, including the people who lost their jobs - and granted, this is an average - but they will end up with an extra $260 of spending power every year for the rest of their lives because of these Chinese imports.
MD: Yes. But, as you said very well, this is an average. That’s the average number. There’s a lot of variation around this number. Some people gain more, but some people actually gain a lot less and maybe even lose.
AS: I imagine a lot of people who hear this are going to be skeptical about all this, because, of course, anytime you hear about hundreds of thousands of jobs being lost because of trade, you know, everyone thinks just of the negative side of this. So how can you be sure, you know, that this net gain for the economy was a result of the surge in Chinese imports?
MD: Well, this is research and economic research. You know, it’s limited. But in my research, what we do is I constructed a very rich and detailed economic model that captures the main forces at play in both international trade and also labor allocation and the difficult choices that the workers make. And it’s within the context of this economic model that I perform a purely controlled experiment to simulate what the U.S. economy would look like with this large increase of imports coming from China of the same size that we see in the data, and also without it. So, all other forces that could be at play during this period are left constant.
AS: I see. Alright. Getting back to the shock, that term you used for this surge in imports, certainly there have been other periods in U.S. history where there have been similar shocks. And I’m thinking, of course, right away about NAFTA. Did you do any research comparing this Chinese shock with, say, a NAFTA shock or any other sort of trade-related shock?
MD: Well, while we studied many, many different aspects of international trade and how that affected U.S. workers, there were some aspects that we left out. For example, whether workers with different characteristics, like more-educated worker or less-educated worker, also whether older worker versus younger worker, were more affected by China or more affected by trade in general. So we need to look closer, a bit more in detail to what happens to these people of different characteristics. And this is, you know, something that I plan to tackle in the future.
AS: All right. OK, Max, you’ve given us a lot to think about. Before we close, I’m wondering if you can give us two or three takeaways that people should remember about this conversation.
MD: Sure. So, well, as we started our conversation, there is a heated debate on who benefits and who loses from trade. What we show in this study is that while an important number of jobs were lost, an equally important number of jobs were created in many other sectors as employers and firms took advantage of cheaper intermediate goods coming from China to build their products. So, these cheaper products in turn saved consumers around the country money that they could use for extra spending. So now, clearly, we still need to figure out how to help those who lost their job and cannot find new ones.
AS: Alright. To read more about Max’s research on this topic, go to his website and you can find that easily by starting out at stlouisfed.org and then clicking on “Research and Data,” and then after that click on “Economists.” Max, thanks very much for your time. We appreciate it. And we hope everyone comes back for our next podcast in this Timely Topic series.