When a number of presidential candidates (including one front runner) take decisive positions in opposition to trade agreements, even in conflict with the traditional thinking of their parties’ leadership, their attitudes could presage a momentous shift in the national zeitgeist.
Candidates, especially during presidential campaigns, are usually lagging indicators of social movements and important changes in the national psyche. This is so for a number of reasons: politicians are extremely cautious when reading and interpreting changes in the mood of their constituents, ideology often acts as a filter that obscures or even reinterprets shifts in the social and political landscapes, polls and the media focus on the “horse race” with simplistic and personality-oriented explanations for anomalies, and other reasons.
Since the 1950s, a bipartisan majority in Congress and virtually every president have supported trade agreements, even if they ran against specific agreements as candidates, (e.g. Clinton and NAFTA, Obama and CAFTA.)
The prevailing economic wisdom was that, while detrimental to certain economic groups, trade was beneficial to the economy as a whole. Today, Trump and Sanders have taken strong stands against free trade, and voter support for their positions has moved the other candidates to become far more critical of trade agreements than they had been previously.
Is this an example of the tail wagging the dog — i.e., are unions and uncompetitive small businesses exercising influence on this particular election beyond their actual economic and political power? Or is it a widespread perception on the part of American workers that trade agreements, not technological advances or the great recession, have denied them employment and a generation of income growth? Or has something more fundamental transpired — has the globalization of supply chains, labor and financial markets rewritten the economic rules governing winners and losers, and in doing so, thrown the classic theory of comparative advantage out the window?
At least one recent study for the Society of Labor Economists and the University of Chicago suggest that, indeed, something quite fundamental has occurred over the last 20 years that may ultimately challenge the trade orthodoxy of the last 200. 1 The catalyst underlying this change was identified as the substantial rise in exports to the U.S from China, beginning just prior to China’s accession to the WTO. The study isolates significant impacts on the U.S. manufacturing sector and broader economic growth stemming from the increase in competition from Chinese exports, focusing on the period from 2000 to 2007 (known as the pre-recession “U.S. employment sag” of the 2000s.
From 1991 to 2001, China’s share of U.S. manufacturing imports rose from 4.5 to 10.9 percent before surging to 23.1 percent by 2011. During the 1990s, U.S. manufacturing employment remained fairly stable, and then plunged 18.7 percent from 2000 to 2007. The study finds that roughly 10 percent of this decline, or 560,000 manufacturing jobs, is directly attributable to the impact of China’s exports on the U.S. manufacturing sector. The study further concludes that the full input-output measure of the impact on U.S. employment, i.e. the impact on upstream suppliers and downstream customers, raises the impact of China’s exports on U.S manufacturing job losses to 985,000 (17 percent of the total decline in manufacturing jobs) and overall U.S job losses to 1.98 million.
The authors then looked at the reallocation and aggregate demand effects. The reallocation effect takes into account the economic impact of interindustry labor and capital transfers (an important element of the comparative advantage model). Interestingly, these were found to be nearly zero, while the aggregate demand effects (measuring the net impact of China’s imports on aggregate U.S demand) were substantially negative, bringing the total impact of China’s exports to the U.S (all sectors) to be roughly 2.4 million jobs lost (at the local level).
These estimates indicate sizable job losses in impacted industries and virtually no offsetting job gains in non-impacted industries, which is consistent with significant job loss due to aggregate demand spillovers. This suggests the equilibrium effects on local employment magnified, rather than offset, the direct effects of China’s exports.
Further, while the great recession reduced overall U.S demand for exports, U.S industries exposed to Chinese exports during the employment sag period continued to experience employment declines during the recession (2008 to 2011). The authors propose that U.S manufacturers realized the decline in export competition during the recession was temporary, whereas the probability of resuming competition with China’s exports after the recession was high, and therefore continued to restructure their industries through the recession.
If the study is correct, it suggests the impact of one country’s (China’s) export competition leading up to the recession was equal to more than a quarter of all 8.7 million U.S jobs lost during the recession, and may account for some of the slowness in the subsequent recovery of U.S labor markets. The authors do acknowledge that China’s rising labor costs will affect its competitiveness going forward.
The question remains — was the rapid rise of China’s manufacturing and export industries over the last 20 years an anomaly and will the resulting effects on the U.S economy gradually dissipate once China has more completely shifted focus to its domestic markets? Or is China’s aggressive export and currency-related policies the harbinger of a broader return to mercantilist trade practices among U.S trading partners?
Regardless of the answer to this question, the fervor among voters in both parties’ primaries for anti-trade candidates could well be justified. Because even while the U.S recovery drives unemployment below 5 percent and adds more than a half million new manufacturing jobs, the prospects that rising competition from exports will continue to affect American workers and they, in turn, the national zeitgeist, seem all but certain.
1 Daron Acemoglu, David Autor, David Dorn, Gordon H. Hanson, and Brendan Price, “Import Competition and the Great US Employment Sag of the 2000s”, Journal of Labor Economics, Vol. 34, No. S1 (Part 2, January 2016), pp. S141-S198.