The Other China Syndrome

, Malcolm A. Kline, 1 Comment

A trio of academics have done a great service (yes, you read that here) in doing what few, if any, VIPs in our nation’s capital will do, namely, pointing up the negative effects of China’s economic policies. “We analyze the effect of rising Chinese import competition between 1990 and 2007 on local U.S. labor markets, exploiting cross-market variation in import exposure stemming from initial differences in industry specialization while instrumenting for imports using changes in Chinese imports by industry to other high-income countries,” David H. Autor, David Dorn and Gordon H. Hanson wrote in an August 2011 report for the Massachusetts Institute of Technology. “Rising exposure increases unemployment, lowers labor force participation, and reduces wages in local labor markets.”

“Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment.” Both Autor and Hanson are also affiliated with the National Bureau of Economic Research which is housed at Harvard.

“Transfer benefits payments for unemployment, disability, retirement, and healthcare also rise sharply in exposed labor markets,” the authors of the MIT study allege. “The deadweight loss of financing these transfers is one to two-thirds as large as U.S. gains from trade with China.”

Autor is based at MIT, Hanson at the University of California at San Diego and Dorn hangs his hat at the Center for Monetary and Financial Studies. “In 1991, low-income countries accounted for just 2.9% of US manufacturing imports,” the authors note. “However, owing largely to China’s spectacular growth, the situation has changed markedly.”

“In 2000, the low-income-country share of U.S. imports reached 5.9% and climbed to 11.7% by 2007, with China accounting for 91.5% of this import growth over the period.”

Although they are careful to qualify themselves, Autor and company place much weight on China’s transformation from communism to market capitalism as a reason for the shift, although much of the evidence for this widely assumed trend seems to come from China itself.

“The growth in low-income country exports over the time period we examine is driven largely by China’s transition to a market-oriented economy, which has involved over 150 million workers migrating from rural areas to cities (Chen, Jin, and Yue, 2010), Chinese industries gaining access to long banned foreign technologies, capital goods, and intermediate inputs (Hsieh and Klenow, 2009), and multinational enterprises being permitted to operate in the country (Blonigen and Ma, 2010),” Autor and his associates assert. “China’s transition has produced a large positive shock to its export supply, with the shock concentrated in labor-intensive goods.”

“Abetting this shock is China’s accession to the WTO, which gives the country most-favored nation status among the 153 WTO members (Branstetter and Lardy, 2006).”

Arguably, the degree to which the West aided and abetted China may be key to their economic performance, particularly since, as Autor and his co-authors admit, “The share of total U.S. spending on Chinese goods rose from 0.6% in 1991 to 4.6% in 2007, with an inflection in 2001 when China joined the World Trade Organization.”

Malcolm A. Kline is the Executive Director of Accuracy in Academia.

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