Trade with China as Technological Revolution

There have been some thought provoking comments recently about the US’s trade with China, and we haven’t had a good trade debate on here in a few months, so I thought I’d open up a thread to discuss it more fully. Let me first stick out my pro-trade neck as a target, though.

Some people suggest that while trade with a country like China helps consumers, it hurts workers, and therefore can’t be good. For some context, here’s a chart that shows the US’s trade with China over the past decade.

So how can economists so consistently assert that trade is good, if our imports from China continually grow and US workers lose their jobs as a result? Workers and consumers are the same people, after all. Naturally, economists recognize that it doesn’t do people any good to be able to get goods cheaper if their incomes have fallen by even more.

But typically that’s not what happens: instead, trade causes overall incomes to rise in real terms. There is a mountain of theoretical and empirical evidence to support that assertion. True, incomes have been rising very little for the past 3 years (and may have fallen) – but that is due to the recession, and not to our imports from China.

HOWEVER, there is an important qualification. While trade increases overall incomes, there are definitely winners and losers. Some individuals are unambiguously hurt by trade – namely those that lose their jobs to foreign competition. Others are helped by trade – namely those that keep their jobs and just get to enjoy lower prices, and those that get jobs that wouldn’t have otherwise existed in the export sector if it weren’t for increased world trade. But there’s no getting around the basic reality that trade helps some people while it hurts others.

Does that mean that trade with China (or any other country) should be limited by government intervention? No.

The reason is that international trade functions exactly like technological progress. Essentially, by moving production to China, the US has discovered a new way to produce a lot of consumer goods more cheaply than before. An invention that magically reduced the labor requirement for manufacturing consumer goods would have the exact same effect on the US economy – it would cost thousands of US manufacturing workers their jobs. Increasing trade with China is no different from a technological revolution.

But, one might still ask, what about the winners and losers from trade? Shouldn’t we still limit trade to help the losers? Let me turn the question around. What makes international trade any different from any other type of economic change – almost all of which create winners and losers? When any new technology is invented there are winners and losers. When the railroad was invented, thousands of people who worked on the canals and on ships lost their jobs to competition from the railroads – and many couldn’t find jobs in the railroads, since they required very different skills. When the tractor was invented, one farmer could do what it used to take ten to do by hand, so millions of farmers who couldn’t compete against the tractor lost their jobs, and had to move to new industries. Yet somehow the US economy still grew and propsered.

You get the idea. My point is this: international trade causes the pattern of economic activity to shift, transform, and evolve in a different way from before – just as technological progress does. If your goal is to try to prevent anyone from ‘losing’ as the economy evolves, banning technological progress would probably work much better than banning international trade. But we don’t, because we know that technological progress makes us all better off in the long run. So instead, we try to help the losers from economic change in other ways, such as by providing a secure social safety net.

So why do things seem worse right now? That’s because the US economy is currently suffering from a prolonged (though relatively mild) economic downturn. That makes it seem like there are more ‘losers’ than usual. And there are. The thing is, most of those additional ‘losers’ right now are losing from the recession, not from trade. Even if we imported nothing from China, there would be more ‘losers’ right now.

One last point. I’ve addressed why I think that imports from China simply make the US economy evolve faster, but what about the trade imbalance? Does it matter that we buy a lot more from China than China does from the US? The answer is yes, it matters in the long run, because the trade deficit means that the US must essentially give China (and other countries) our assets to pay for what we’re importing. But, as I’ve discussed in posts here and here, the cause of our trade imbalance is our low savings and high consumption, so limiting our trade with China wouldn’t help with that problem. All it would do would be to limit the technological revolution that is currently transforming US manufacturing, one which will inevitably make the US more prosperous.