How Free Trade Killed the American Working Class

Noah Smith bluntly states that free trade with China has devastated the American working class. Moreover, he attacks economists for being unwilling to question their assumptions that free trade is always good. He starts by citing a new study showing just how devastating free trade with China has been to American workers:

But look at actual economics research, and you will find a very different picture. The most recent example is a paper by celebrated labor economists David Autor, David Dorn and Gordon Hanson, titled “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade.” The study shows that increased trade with China caused severe and permanent harm to many American workers:

Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in U.S. industries more exposed to import competition…but offsetting employment gains in other industries have yet to materialize.

What is the impact upon American workers?

Autor, et al. show powerful evidence that industries and regions that have been more exposed to Chinese import competition since 2000 — the year China joined the World Trade Organization — have been hit hard and have not recovered. Workers in these industries and regions don’t go on to better jobs, or even similar jobs in different industries. Instead, they shuffle from low-paid job to low-paid job, never recovering the prosperity they had before Chinese competition hit. Many of them end up on welfare. This is very different from earlier decades, when workers who lost their jobs to import competition usually went into higher-productivity industries, to the benefit of almost everyone.

In other words, the public might have been wrong about free trade in the 1980s and 1990s, but things have changed. Popular opinion seems to be exactly right about the effect of trade with China — it has killed jobs and damaged the lives of many, many Americans. Economists may blithely declare that free trade is wonderful, but our best researchers have now shown that public misgivings about these smooth assurances have been completely justified.

So what’s the deal with economists?

Why are economists so willing to declare to the world that free trade is good, even after reading papers like the one by Autor et al.? Part of the problem is the definition of “good.” According to most models of trade, reducing trade barriers raises efficiency — which is to say, total gross domestic product. But efficiency says nothing about fairness, and almost any model of trade will show that some people, industries and regions lose out. If most Americans experience slight gains from lower import prices, and a few lose their livelihoods and have to go on welfare, economists call that a “good” outcome, because they are so focused on the concept of efficiency. But because the public cares about a lot more than efficiency, the job losses in industries and regions knocked out by China since 2000 have made economists seem increasingly callous and out of touch.

But this is only part of the problem. Economists are also stubbornly unwilling to question their benchmark theories, even when the evidence presents a challenge to these theories. The fact that Autor et al. find total national employment declining in response to trade with China should be cause for concern. Standard trade models, especially the simple ones taught in Econ 101, predict that this shouldn’t have happened. Autor et al. sternly rebuke the economics profession for relying too much on theory, and not enough on evidence, when it comes to the issue of trade:

We argue that having failed to anticipate how significant the dislocations from trade might be, it is incumbent on the economics literature to more convincingly estimate gains from trade, such that the case for free trade is not based on theory alone, but on a foundation of evidence.

In other words, economists love their theories but struggle to understand or to care about the actual effect of those theories in practice upon living, breathing human beings. Economists do often make their own version of moral arguments–that raising living standards in China and Bangladesh are worth lowering living standards in the United States. There are of course several problems with this argument. First, why do economists get to decide who has jobs and who does not have jobs? What higher authority do these people think they are? Second, it’s entirely unclear whether these arguments are even correct. It’s certain that the global trade regime has created a class of wealthy people in every affected nation. But the evidence is mixed otherwise. Yes, standards of living have risen in China. But for all the talk about this, defenders of this system have absolutely no answer to how free trade has destabilized Latin America, an area of the world they prefer to forget about entirely. It’s also less than clear that creating working conditions where over 1100 people die in a factory collapse is somehow helping the people of Bangladesh and it’s pretty bloody horrendous that this system leads to the slaves in the global fish trade with our Asian trading partners that feeds ourselves and our pets. Third, what is clear is that long-term economic instability in the United States is having enormous implications for governance and social policy, including the erasure of working class voices from politics, the rise of corporate cash to replace those voices, right-wing populism up to the point of fascism (and to a lesser extent the Sanders campaign on the left), and the subcontracted, franchised, outsourced, temp economy. None of this is good for Americans, unless you are rich. Like a lot of economists.

A lot of economists are the academic version of H.A. Goodman and Walker Bragman. They can foist their theories on the public without worrying too much about it because they aren’t going to be affected by the outcome. If a future of low-paid work in the U.S. is in the offing, what do they care? Their positions are secure. This is always the problem with making policy from 30,000 feet. If you don’t care to understand how your policies will actually affect the people in your community, you probably don’t care about those people in the first place.

It’s time to rethink the entire trade system, ensuring it helps the American working class while also using the tools we have at our disposal to demand justice for workers around the world when American companies relocate there. Otherwise, we are destroying ourselves and often killing Asian and Latin American workers.