The View

Trump has a point when he says US lost out in China trade deals

Economists point fingers at the many establishment figures who failed to recognise that the China labour shock was a game-changer

PUBLISHED : Monday, 01 February, 2016, 9:47am
UPDATED : Monday, 19 September, 2016, 3:08pm

Here’s an unsettling thought: what if Tim Cook is a liar, and Donald Trump a truth-teller.

Cook, the chief executive of Apple, recently told a popular American television news programme that labour costs had nothing to do with why the iPhone is manufactured in China. “It’s skill,” he explained to 60 Minutes’ Charlie Rose. “You can take every tool and die maker in the United States and probably put them in a room that we’re currently sitting in. In China, you would have to have multiple football fields ... it’s a focus of their educational system.”

At the very least, this is disingenuous. With a population of 1.3 billion, there are more Chinese in almost any category, not just tool and die makers. Apple’s key supplier, Foxconn, is the biggest employer of factory workers in the world. Scale helps push down costs. While vocational training has expanded in China, many factories still take in rural high-school dropouts and train them on the job.

China’s huge population was its chief comparative advantage when it first opened to the world. In the three decades that followed, the wages of US low-end workers stagnated, then fell in real terms. Common sense would indicate there might be a connection. Yet most economists and policymakers found only a peripheral effect, citing technological change as the main factor for rising income inequality in the West.

Now, however, a new paper with an alternative thesis is getting a lot of attention. The China Shock: Learning from Labour Market Adjustment to Large Changes in Trade, by economists David Autor, David Dorn and Gordon Hanson, was described by prominent US economist Tyler Cowen as among “the most important work done by economists in the last 20 years”.

China’s unprecedented rise from widespread poverty bears testimony to trade’s transformative economic power
David Autor, David Dorn and Gordon Hanson

The paper effectively makes the same point that controversial US presidential candidate Donald Trump does: that China got the better of the US on trade deals. Moreover, the authors point fingers at the many establishment figures who failed to recognise that the China labour shock was a game-changer.

So for example in a 1995 paper – Are Your Wages Set in Beijing?” – the economist Richard Freeman emphatically answers “no”. Even leftist economists were blind to the cost accruing to working-class Americans, the authors say, pointing to a 2000 paper by Paul Krugman in which he writes: “A country serves its own interests by pursuing free trade.”

Policymakers expressed similar conclusions. An Organisation for Economic Cooperation and Development study says “evidence as to the role of globalisation in growing inequality is mixed”, while a 2015 report from US President’s Council of Economic Advisers extols the benefits of free trade to US economic health.

According to Autor and his colleagues: “The broad sentiment that emerged in the literature was that labour-market developments were primarily attributable to technological changes that complemented high-skill workers and reduced labour demand in manufacturing. The impact of international trade on these outcomes seemed to be modest, at best.”

They estimate that the net impact of import growth from China cost 2.4 million US jobs between 1999 and 2011, and also pushed down wages for low-end workers elsewhere in the economy. Falling aggregate demand added to the economic cost. And the taxpayer burden increased: government transfer payments rise by US$57.73 for every US$1,000 in local import exposure per worker, according to the paper.

The paper is not anti-globalisation. “China’s unprecedented rise from widespread poverty bears testimony to trade’s transformative economic power,” the authors write. But they express astonishment that economists were unable to shake the core belief, going back to Adam Smith, that the benefits of free trade are spread equally.

“Better understanding when and where trade is costly and ... developing effective tools for managing and mitigating the costs of trade adjustment should be high on the agenda for policymakers and applied economists,” they conclude.

One can’t imagine that Trump’s promise to push through 45 per cent tariffs on Chinese imports, if he were elected president, is the type of “effective tool” the authors have in mind. On the other hand, the world might not even be facing the prospect of a President Trump – brought to power by the votes of angry, dispossessed, low-skilled workers – if the guys with the PhDs had earlier confronted the cost of the China labour shock.

Cathy Holcombe is a Hong Kong-based financial writer