The China Syndrome: Local Labor Market Effects of Import Competition in the United States

“The value of annual U.S. goods imports from China has increased by a staggering 1,156% from 1991 to 2007.”  write David H. Autor, David Dorn and Gordon H. Hanson in The China Syndrome: Local Labor Market Effects of Import Competition in the United States on mit.edu.

The rapid increase in U.S. exposure to trade with China and other developing economies suggests that the labor-market consequences of trade may have increased considerably during the past 20 years. Previous research has studied the effects of imports on manufacturing firms or employees of manufacturing industries. By analyzing local labor markets that are subject to differential trade shocks according to initial patterns of industry specialization, this paper extends the analysis of the consequences of trade beyond wage and employment changes in manufacturing.

Specifically, we relate changes in manufacturing and non-manufacturing employment, earnings, and transfer payments across U.S. local labor markets to changes in market exposure to Chinese import competition. While most observed trade flows into the U.S. are the result of both supply and demand factors, the growth of Chinese exports is largely the result of changes within China: rising productivity growth, a latent comparative advantage in labor-intensive sectors, and a lowering of trade barriers. In light of these factors, we instrument for the growth in U.S. imports from China using Chinese import growth in other high-income markets.

The analysis finds that exposure to Chinese import competition affects local labor markets along numerous margins beyond its impact on manufacturing employment. Consistent with standard theory, growing Chinese imports reduces manufacturing employment in exposed local labor markets. More surprisingly, it also triggers a decline in wages that is primarily observed outside of the manufacturing sector. Reductions in both  employment and wage levels lead to a steep drop in the average earnings of households.

The author also find an important margin of adjustment to trade that the literature has largely overlooked: rising transfer payments through multiple federal and state programs. Comparing two Commuting zones (CZs) at the 75th and 25th percentiles of rising Chinese trade exposure over the period of 2000 through 2007, we find a differential increase in transfer payments of about $63 per capita in the more exposed CZ. The largest components of these transfers are federal disability, retirement and in-kind medical transfer payments. Unemployment insurance and income assistance programs play an important but secondary role. By contrast, the Trade Adjustment Assistance (TAA) program, which specifically provides benefits to workers who have been displaced due to trade shocks, accounts for a negligible part of the trade-induced increase in transfers.

Overall, our study suggests that the increase in U.S. imports of Chinese goods during the past two decades has had a large impact on employment and household incomes, benefits program enrollments, and transfer payments in local labor markets exposed to increased import competition. These effects extend outside manufacturing and imply changes in worker and household welfare.

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