The downsides to trade with China

Marketplace Staff Sep 27, 2011

The downsides to trade with China

Marketplace Staff Sep 27, 2011

Kai Ryssdal: Senate Majority Leader Harry Reid said today he’s going to bring a bill to the floor in the Senate next week that goes after Beijing for manipulating its currency. Just the latest indicator that there are those in Washington and elsewhere who say we’re not getting all we could from our trading relationship with China.

Gordon Hanson is an economist at the University of California, San Diego whose most recent research says exactly that. Good to have you with us.

Gordon Hanson: My pleasure to be with you, Kai.

Ryssdal: Conventional wisdom has it that trade is, in essence, good, and trade with China, while painful, is positive. And you’re not disputing that, but there’s a downside here that we haven’t really thought about.

Hanson: There is, and it’s something that economists have been uncovering slowly over time; it doesn’t often get a great deal of attention because people like to tell the good news story about international trade, but there are consequences for workers who are in the front line of international competition.

Ryssdal: Lay them out. You went and surveyed — you and your colleagues went and surveyed every county in the United States, right, for its exposure to Chinese trade?

Hanson: If you look across U.S. regions, different parts of the country produce very different types of goods. You’re worse off in certain parts of North Carolina, certain parts of Tennessee; it’s the southern Midwest and kind of northern southeast that have taken the brunt of this impact. But that said, the impact of China trade has really been felt nationally. Here in San Diego, where I live, we’ve lost sporting goods industries as a result of Chinese competition. Callaway golf clubs, which used to be made right here in Carlsbad, are now made in China.

Ryssdal: And when you are exposed, what happens?

Hanson: Larger reductions in manufacturing employment; larger increases in the fraction of your population that is unemployed; and ultimately, what that leads to is greater uptake of government benefits of various types.

Ryssdal: And the commensurate increases taxes that we have to have to pay for those, right?

Hanson: Correct.

Ryssdal: Is there a way for us to know what trade with China is costing us? I mean, yes, there’s a net benefit, but there are significant downsides, right? Do we know how big those downsides are?

Hanson: We have a sense. So the benefits from China we’re estimating are on the order of $100 per capita in the United States. So we’re talking about efficiency losses associated with the government benefits that are on the order of $25 to $30 per capita. And so you say that $100 savings we got from making purchases at Wal-Mart, well we’re going to lose $25, $30 of that associated with a tax liability, we might face today, we might face somewhere down the line.

Ryssdal: Is this research that says trade with China is bad and we ought not do it?

Hanson: Absolutely not. As economists, you’re sort of beholden to the idea that free trade is good because it increases global efficiency. But to get people to buy into that notion, you have to convince them that if they’re going to take it on the chin, there’s going to be something there to help them make adjustments. And so what we’ve got to think about is a set of public policies that help workers who are on the front line of competition with China move into other sectors and do so in a manner that doesn’t impose all the burden on them.

Ryssdal: So if you go to China — I mean, I was in Shanghai two-and-a-half-ish months ago, and I’ve been going repeatedly for the past dozen years — if you’re there, you see these changes happening and you know that something’s coming. Did we just not plan for this, or is it happening too fast for us to plan?

Hanson: Well, we’re living through an unusual moment. We don’t normally see very large economies go through very rapid adjustment. We’ve certainly seen economies that have opened themselves to global trade, that have privatized, that have deregulated like much of China has done. We’ve seen that before. But never on this scale. That’s what’s different this time around.

Ryssdal: Gordon Hanson is a professor of economics at the University of California, San Diego. Professor, thanks a lot for your time.

Hanson: Thanks very much, Kai.

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