Cheap imports from China have led to a massive loss of jobs in industry, says Zürich economist David Dorn. Those affected often voted far right or far left.
NZZ [Neue Züricher Zeitung] on Sunday: Your research work shows that Chinese imports have cut millions of jobs in the United States. What caused that?
David Dorn: Since the '80s and '90s, China has risen from a country that was almost completely isolated from the world economy to an extremely successful producer of goods for the world market. In the process, industrial firms in the U.S. and Western Europe saw themselves subject to a quickly growing competition. Together with two American colleagues, I have shown that because of trade with China, jobs were massively cut in especially affected areas of the U.S., average wages were lowered and more people became dependent on government assistance.
How many jobs are you talking about?
Our estimates mean that around 2 million to 2.4 million jobs in the U.S. have been cut due to Chinese imports since the end of the '90s.
Is that really only because of China?
American industry was also hard hit by progressive automation and the great recession in the years 2007 to 2009. Trade with China represents around one-quarter of the total decline in employment in this sector.
How did you conduct your research?
We analyzed how hundreds of sectors and geographic regions developed over an extended period of time. Because of their economic structure, these sectors and regions were affected to varying degrees from growing import competition or automation. As a result it becomes possible to keep the different employment effects of trade, technology and other factors separate. We used detailed data of the government’s Social Security Administration to examine the employment career of persons whose employers were especially subject to international trade.
Your findings are misaligned with the economic theory that says that the profits of the exporters far outweigh possible losses with globalization.
Initially, we prove that next to the winners, there are also losers. For a long time there was the notion based on theoretical models that the winners could always compensate the losers. That entrepreneurs and consumers who profit from trade compensate workers who lose their jobs. Particularly in the U.S. it becomes apparent that this compensation only takes place in a very limited manner. In addition to that, there was a long-held delusion that the U.S. would have an enormously flexible job market. In the meantime, it has been empirically proven that in the U.S., too, some job losses lead to long-lasting unemployment. Or that affected persons can only continue to work under considerably worse conditions.
How strong is the influence of the currency exchange rate? China held the renminbi artificially low for years.
That is often cited as an argument in the political environment. There is, however, little scientific evidence that the influence of the currency exchange rate was really significant. What is decisive is that China dramatically increased its productivity. In addition, barriers for internal mobility were removed. People from poor, rural areas moved to the coastal cities and provide a large supply of cheap labor there.
In the U.S. there are also heavy winners: consumers as well as multibillion dollar firms that profit from world trade. Why does the compensation for the losers not work?
The government is supposed to protect the people who through no fault of their own lose their jobs. Unemployment insurance specifically for people whose jobs were a victim of globalization would be preferable. Such a program already exists in the U.S., but it is financially unimportant. In comparison to Europe, the American welfare state is not generous enough. Anyone who becomes unemployed is in danger of impoverishment or even becoming homeless. Health care costs can also become a big problem. We showed that the frequency of marriage also declines in hard-hit areas. We see that children more often grow up in single-parent households, frequently below the poverty line. These results are alarming.
Did the financial crisis of 2008 exacerbate the situation?
The number of employees in the industrial sector had already declined sharply; however, the real estate boom temporarily allowed many jobs to develop in the construction sector that covered over the problem. The crisis clearly changed the awareness of the economy. A high income was long considered a sign of personal achievement. In the meantime, many of the high salaries are no longer seen as justified. Inequality has risen to be a big issue. The perception has gained acceptance that the American economy is battling large problems.
What does the restructuring mean politically?
Radicalization has developed. In regions that have suffered under competition from Chinese imports, candidates positioned far right or far left are more likely to be elected.
Donald Trump criticizes free trade in sharp terms. It is not in America’s best interest. Does he have a point there?
At least short-term, the negative consequences of trade exceed the positive effects for certain workers and regions. Population groups that previously had well-paid jobs face an uncertain future. The social decline leads to great disenchantment with politics.
Trump recommends an import duty of 45 percent on goods from China. What do you think of this?
If one country unilaterally imposes punitive duties on another country, further problematic repercussions follow. And it is not clear that the lost jobs will come back. If factories have once permanently shut down, it is difficult to reopen them. If the duty is limited to Chinese goods, imports from other countries like Vietnam, Indonesia or Bangladesh would probably increase.
Would import duties 20 years ago have been sensible in order to mitigate the negative consequences?
An incremental liberalization would presumably have led to lower conversion costs.
Why is Switzerland much less affected by China’s rise?
Switzerland is well positioned in branches that China could exploit as markets. Counted among them are the pharmaceutical sector and machine industry, as well as clocks and luxury goods. The American industrial sector produces primarily for the American market. It also produced cheap mass products on a large scale, which went well until China became an even cheaper competitor. The Swiss economy is markedly more specialized and has well-qualified workers at its disposal.
Democrat Bernie Sanders complains that 2.7 million U.S. jobs were lost to China. Starting from that premise, he positions himself against the planned free trade agreement between the U.S. and the European Union. How do you assess that?
It is certainly problematic, when one projects results that pertain to U.S. trade with China onto other trade relationships. What is particular about trade with China is that that country has a significantly lower wage level than the U.S. or Europe — and can produce at a markedly reduced rate. Before, a large part of world trade took place between the U.S. and Europe or Canada, thus between countries that produced under similar conditions. In the process, the positive aspects of trade were more strongly felt; German consumers can, for example, buy French cars without ruining the automobile industry in one of these countries.
Which U.S. regions were hardest hit by the Chinese import shock?
The heavily affected areas are distributed all across America. The region around Detroit and the Great Lakes suffered less because China hardly competed with the auto industry. However, the textile and shoe industries, the manufacture of leather goods, furniture, toys and home electronics were massively affected. The city of Raleigh in North Carolina had the misfortune to have specialized early in the textile, furniture and the computer industry. These industries experienced enormous hardship from cheap Chinese imports. Industrial production in the southern states around Tennessee, where textiles are manufactured with cheap labor and weak union protection, was just as hard hit.
Could your research be used politically, for instance, by opponents of the free trade agreement between the U.S. and the EU?
It is entirely justified if one evaluates possible trade agreements critically. At the same time, one should not extrapolate to other trade agreements from the specific trade relationship between the U.S. and China. But one should not naively assume that every trade agreement will automatically bring only advantages.
Has the White House taken notice of your research?
The American government showed great interest in our research results. Last year’s presidential report on the state of the economy dedicated an entire page to our research. My American colleague David Autor, who collaborated on the studies, was invited twice to speak directly to President Obama about our results.
Does that have concrete political consequences?
For research it is already an important step when decisionmakers make an effort to assimilate the newly acquired knowledge. That trade with China had negative repercussions does not directly lead to a clear course of political action because the resulting loss of jobs cannot simply be reversed. In the U.S. the question is raised to what extent one can cushion the negative consequences in the job market through welfare state measures. The Obama government has, for example, established mandatory health insurance. Such measures meet with hefty opposition. One also sees these very different viewpoints in the primary campaigns for the presidential election, in which Trump on the one side suggests fighting Chinese competition with high duties or with walls against immigration. On the other side, Sanders floats the idea of developing social institutions that correspond to a European social state.
The U.S. economy has grown roughly 2.5 percent in the last few years; the unemployment rate has fallen to 5.8 percent. Are you painting too bleak a picture?
In public, the unemployment rate is perceived as the temperature curve of the job market. Yet the focus on this measure is problematic. A person is only considered unemployed if he is actively seeking employment. All of the people who have given up this job search fall outside of this statistic. In the U.S., the percentage of all people who pursue gainful employment has decreased from almost 75 percent in 2000 to 68 percent today. Especially among low-qualified persons with little education, there are more and more people who never gain a foothold in working life. That is people between the ages of 20 and 30 who neither pursue an education or gainful employment, but instead often spend their time with TV or video games.
China’s advantages are dwindling. Could jobs come back to the U.S.?
In the last few years there have frequently been media reports about firms who have shifted jobs back to the U.S., but those are unusual cases. It is more probable that we will increasingly see a shift from jobs in China to other low-wage countries that are not as far developed.
What is your personal election prognosis – Trump, Sanders or Hillary Clinton?
It looks very much like Hillary Clinton will be nominated as the candidate of the Democratic Party. The opinion polls predict that Clinton should win the general election, but Trump has already been greatly underestimated in the primaries. The outcome of the general election is therefore pretty open.
David Dorn is 37 years old and has already published five articles in the American Economic Review, the prestigious professional journal. Since 2014, Dorn has been professor of international trade and labor markets at the University of Zürich and the UBS Center for Economics. Previously he was an assistant professor in Madrid and guest professor at Harvard University. Dorn grew up in Dielsdorf (ZH), studied in St. Gallen and finished with a doctorate.