The China Syndrome: Local Labor Market Effects of Import Competition in the U.S.

Researcher: Gordon Hanson (UC San Diego) 
Location: United States

Project Description

China Syndrome

The value of annual United States goods imports from China increased by a staggering 1,156 percent from 1991 to 2007, whereas U.S. exports to China grew by much less. The rapid increase in U.S. exposure to trade with China and other developing economies over this period suggests that the labor-market consequences of trade may have grown considerably relative to earlier decades.

This study analyzes the effect of rising Chinese import competition between 1990 and 2007 on U.S. local labor markets. Much previous research has studied the effects of imports on manufacturing firms or employees of manufacturing industries. By analyzing local labor markets on a wider scale, this research extends the analysis of the consequences of trade beyond wage and employment changes in manufacturing. Specifically, the research relates 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 reform-induced changes within China: rising productivity, greater investment in labor-intensive export 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 study finds that rising imports from China affect local labor markets not just through manufacturing employment, which unsurprisingly is adversely affected, but also in a number of other ways. Rising imports trigger a decline in wages primarily observed outside the manufacturing sector. Reductions in both employment and wage levels lead to a steep drop in the average earnings of households. These changes contribute to a sharp rise in transfer-benefits payments — unemployment, disability and retirement, through federal and state programs — in more trade-exposed labor markets, revealing an important margin of adjustment to trade that the literature has largely overlooked.

Theory suggests that trade with China yields aggregate gains for the U.S. economy. Our study also highlights the distributional consequences of trade and the medium run efficiency losses associated with adjustment to trade shocks. The consequences of China trade for U.S. employment, household income and government benefit programs may contribute to public ambivalence toward globalization and specific anxiety about increasing trade with China.