Page 1 of 5 http://nyti.ms/ocntgp THE OPINION PAGES CONTRIBUTING OP-ED WRITER Is the American Middle Class Losing Out to China and India? APRIL 1, 2014 Thomas B. Edsall President Obama may be right: Free trade is a winning strategy that will lower consumer costs and expand employment in exporting industries. When 98 percent of our exporters are small businesses, new trade partnerships with Europe and the Asia-Pacific will help them create even more jobs, the president declared in this year s State of the Union address. In the short run, however, trade imposes heavy costs on American workers in both the manufacturing and service sectors, particularly on those least equipped by training and education to adapt. Branko Milanovic, a visiting professor at CUNY who once served as a senior economist at the World Bank, has tracked worldwide changes in income growth from 1998 to 2008. Milanovic calculates that the middle class in China and India experienced 60 to 70 percent income growth from 1998 to 2008, while growth stalled for the middle and working classes in the United States.
Page 2 of 5 The question then becomes, in Milanovic s words, Does the growth of China and India take place on the back of the middle class in rich countries, especially the United States? Milanovic does not claim a direct causal relationship, but contends that the two may not be unrelated. Milanovic has his critics. I asked Jagdish Bhagwati, a professor of economics at Columbia and an expert on international trade, for a different perspective on the impact of rapid growth in India and China on households in the United States. Bhagwati countered with two points. First, that technological innovation is driving wages down; and, second, that there are substantial gains to American consumers from foreign trade. As Bhagwati put it: There is an alternative narrative that says the pressure on our workers incomes arises from continual and deep labor-saving technical change; that many labor-intensive activities have already been lost here; and that therefore the workers are not going to lose as producers from lowered world prices of labor-intensive goods, but rather the workers will gain as consumers benefit from these cheapening prices. In this scenario or narrative, trade with the poor countries (e.g., flip-flops, cheap lingerie from Macy s rather than more expensive lingerie from Victoria s Secret) moderates the fall in wages that technical change brings about. Entering the fray, three economists David Autor of M.I.T., David Dorn of the Center for Monetary and Financial Studies in Spain, and Gordon Hanson of the University of California, San Diego have analyzed the employment consequences of globalized trade and technological advance. In a series of papers they wrote together Trade Adjustment: Worker Level Evidence, The China Syndrome: Local Labor Market Effects of Import Competition in the United States and Untangling Trade and Technology: Evidence from Local Labor Markets Autor, Dorn and Hanson find that in the case of trade with China, there are very painful consequences for specific categories of American workers. Their findings show why voters are wary of free trade agreements. Relative to the average employee in manufacturing, workers in industries that face stronger competition from imports garner lower cumulative earnings and are
Page 3 of 5 at elevated risk of exiting the labor force and obtaining public disability benefits, Autor, Dorn and Hanson write. And if manufacturers are ranked on a scale of 1 to 100 for exposure to import competition from China, between 1992 and 2007, workers in firms high on the exposure scale lost nearly half a year s pay, compared with workers in firms at the low end of the scale. The exposure of American workers to import competition from China more than doubled after China s entry into the World Trade Organization in 2001; one quarter of the decline in manufacturing employment in the United States since 2000 can be explained by import competition. The authors calculate the income losses over a period of 10 years during which imports from China increased by $1,000 for each American worker in a competitive industry. The decline was sharper for the subset of workers without college degrees, at 1.21 percentage points, compared with a 0.53 percentage point decline for those with college degrees, but it is notable that wages for both groups fell. The domestic employment declines resulting from trade with China are disproportionately high in states where labor-intensive manufacturing of furniture, toys, apparel, footwear and leather goods has been most concentrated: Tennessee, Missouri, Arkansas, Mississippi, Alabama, Georgia, North Carolina and Indiana. Another group of economists that includes Avraham Ebenstein of the Hebrew University of Jerusalem, Margaret McMillan of Tufts, Ann Harrison of the Wharton School and Shannon Phillips of Boston College have found similarly negative effects on workers in this country from trade with low-wage countries. In their paper Why Are American Workers Getting Poorer? these four economists find that offshoring to low wage countries is associated with wage declines for U.S. workers, and the workers most affected are those performing routine tasks. Import competition is associated with wage declines, while exports are associated with wage increases. We present evidence that globalization has led to the reallocation of workers away from higher wage manufacturing jobs into other sectors and other occupations. We estimate that occupation switching due to trade led to real wage losses of 12 to 17 percent.
Page 4 of 5 A separate paper, Understanding the Role of China in the Decline of US Manufacturing, by Ebenstein, McMillan, Yaohui Zhao and Chanchuan Zhang, both of Peking University, found that Chinese employment growth has been largest in industries with US employment declines, suggesting substitution between US and Chinese workers and that during the sample period, while the share of workers performing routine occupations in the US declined, the share increased in China, and these changes were correlated across industries. The question that arises next is whether the detrimental consequences of trade for developed countries are inevitable in a global marketplace, and whether those negative consequences outweigh the benefits. Ellen Frost, an adjunct fellow at the East-West Center who was counselor to the United States trade representative from 1993 to 1995, posed a rhetorical question during a phone interview: If you sealed borders and did not trade, would you be able to stop the decline in manufacturing jobs? Frost pointed out that it s a political fact that jobs actually or allegedly lost are much more visible than gains from imports or exports. Echoing Bhagwati, Frost mentioned the positive outcomes for American consumers, like the way that foreign competition forced the domestic auto industry to pay attention to quality and to stop producing crummy cars. Free traders argue that attempts to ameliorate the effects of trade can prove to be extremely costly. Gary Clyde Hufbauer and Sean Lowry, both of the Peterson Institute for International Economics, make this case in their paper US Tire Tariffs: Saving Few Jobs at High Cost. The Obama administration s decision to restrict tire imports from China, they contend, saved a maximum of 1,200 jobs at the total cost to American consumers from higher prices of $1.1 billion in 2011. The cost per job saved was at least $900,000 in that year. Only a very small fraction of this bloated figure reached the pockets of tire workers. Instead, most of the money landed in the coffers of tire companies, mainly abroad but also at home. Back on the other side of the trade issue, the pro-labor Economic Policy Institute has a comprehensive set of proposals, New Trade Policies for a New Era, that would radically alter United States trade policy. The proposed policies include the abandonment of congressional fast-track approval of trade
Page 5 of 5 agreements, the initiation of sanctions against China for currency manipulation, the renegotiation of free trade agreements and the replacement of the Office of the U.S. Trade Representative and the Commerce Department with a new department of industry and trade with a mandate to support job creation in the United States. But even the E.P.I. analysis acknowledges that market forces are unlikely to be constrained: the globalization of investment and production has eroded links between what is in the best interest of U.S. corporations and the national interest. In a March 4 essay for Project Syndicate, Malthus, Marx, and Modern Growth, Kenneth Rogoff, an economist at Harvard, poses a more fundamental question about broad economic trends, a question that goes to the heart of the dilemma over trade: Will each future generation continue to enjoy a better quality of life than its immediate predecessor? In developing countries that have not yet reached the technological frontier, the answer is almost certainly yes. In advanced economies, though the answer should still be yes, the challenges are becoming formidable. For those American workers who have been battered by foreign competition, the possibility of a prolonged free fall cannot be discounted. 2014 The New York Times Company