On the So-called “China Shock”

From Don Boudreaux.

Here’s a letter to the Washington Post:

Megan McArdle is correct that free traders have so far failed to convince the public of the merits of free trade (“How free-traders blew it,” June 27). However, she errs in pointing to the so-called “China shock” as real-world evidence against economists’ case for free trade.

The econometricians who advanced this thesis claim to have found that U.S. trade with China reduced overall employment in the U.S. by 2.4 million from 1999 through 2011. That’s an average net monthly job loss, over the span of those 13 years, of 15,385. Put this figure in perspective: each month in the U.S., since the end of the Great Recession, on average about 1.7 million non-farm jobs are destroyed. (Typically, even larger numbers of jobs are created, thus resulting in net monthly increases in total employment.) So even accepting the so-called “China shock” thesis on its face, U.S. trade with China was responsible for less than one percent of all job destruction. Most jobs are destroyed just as most jobs are created: by the ordinary churn of competitive, innovative markets, often having nothing much to do with international trade. Why would Americans calmly accept as a matter of course the economic forces responsible for 99 percent of all job destruction but become tormented and lured to populism by a force that is responsible for no more than one percent of job destruction?

Moreover, the vanishingly small size of the “China shock” figure combines with the fact that the time span covered by the study includes the Great Recession to suggest that it is impossible to conclude that trade with China is responsible for any net reduction in U.S. employment. Because non-China forces in the U.S. economy monthly destroy close to 1.7 million jobs – and also because during each typical month slightly more than 1.7 million jobs are created – there is simply no way that the “China shock” authors, regardless of their brilliance at using econometrics, can single out trade with China as being responsible for a net average monthly reduction, over the course of 13 years, of a mere 15,385 jobs.

It might well be that there are today 2.4 million fewer jobs in the U.S. than there would have been had employment trends up to 1999 held steady. But if so, it is impossible to credibly pin the blame on one force – trade with China – among the countless forces that regularly destroy and create jobs in the U.S. economy.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030"

 Cafe Hayek also posted an excerpt from an article by Veronique de Rugy.

"My intrepid Mercatus Center colleague Veronique de Rugy busts foundational myths about U.S. trade with China. A slice:

Also puzzling is the constant refrain about China producing more than it needs. Even if this overcapacity were a boon for China, it would still be to the benefit of millions of American consumers. It lowers costs for thousands of small U.S. manufacturers and steel consumers. But in reality, this “overproduction” is a tragedy for the Chinese people because their government’s subsidization of steel production inevitably diverts resources from other areas of the Chinese economy. I don’t hear Americans and Europeans complaining about all the stuff China isn’t producing because its government stupidly wants to produce a lot of steel. So the next time you encounter someone lamenting China’s overcapacity, shed a tear or two for the Chinese people and recognize that some American non-steel production might fall if (and when) Beijing stops diverting so many resources into Chinese steel factories."