David Autor believes both these things to be true: one, that Donald Trump’s diagnosis of trade with China as the source of woe for countless American workers was both accurate and a crucial part of his appeal on his march to the White House. And two, that Trump’s plan to help those workers by cracking down on trade is likely to backfire.
Autor, a leading empirical economist at MIT, has made something of a habit of looking at big sets of data and drawing conclusions that defy the commonly held wisdom of mainstream economic theory. His work is one of the best guides to the economic forces Trump tapped to win the election last year.
Along with economists David Dorn and Gordon Hanson, Autor has published some groundbreaking work over the past few years on how China’s evolution into a manufacturing colossus has created seismic shocks in towns scattered across the American heartland. What they’ve learned is that competition from China, which accelerated dramatically after it plugged into the global economy by joining the World Trade Organization in 2001, has had unexpectedly long-lasting effects on US labor markets.
At least a million people have not only lost their jobs but have struggled a great deal to find new ones to replace them. That period of limbo has in turn radicalized communities politically, caused a plunge in the marriage rate, and increased the share of children born into poverty. Autor suspects that the long-neglected effects of China’s rise on American workers likely helped tip the election to Trump.
Autor and his collaborators’ works have been hailed as some of the most important work on trade in decades. In modern economics, open trade has generally been regarded as a win-win for the countries involved, and the costs in terms of job displacements have been assumed to be modest and short-lived. Autor’s findings, which surprised even him, have shown that’s not always the case.
I spoke with Autor over the phone about his work on “the China shock” and what Trump gets right and wrong about trade. This transcript has been edited for length and clarity.
You and your co-authors David Dorn and Gordon Hanson wrote a paper about China that gained a lot of attention — what did you find?
The China event was really different in many, many ways from the usual impact we experience from trade. The most important was China’s incredibly rapid rise from really a backward economy in a state of perpetual crisis from the Mao Zedong era forward to a very sophisticated, high-quality, productive, low-cost manufacturer. That sort of march to the frontier occurred over the course of maybe 20 years, and it's really world-historical — nothing like that has ever happened in a country that large. And the size really matters: China goes from essentially 1 percent of world manufacturing GDP around 1980 to 20 percent around 2010, and that's a massive, massive change. We never see things like this occur in modern history.
The way the China shock played out in the US, it really did have the effect of having very concentrated impacts in certain labor-intensive sectors, like shoes, textiles, dolls, and commodity furniture. About 40 percent of the decline in manufacturing between 2000 and 2007 was due to the China shock, so roughly a million fewer manufacturing jobs. And manufacturing is very geographically concentrated. It's not like there's a few dolls made in every county across the country — these things are made in just a few places. So when an industry goes, it's not like a few people lose jobs in each country; a lot of people lose jobs all at once in the same place.
So, yes, import-competing manufacturing declined. That had to happen, right? We knew if we were importing all these textiles and leather goods and so on that of course employment of US workers in those sectors would have to decline. But then the surprise was how slow and painful the adjustment process was: how much we saw workers not flowing smoothly into other sectors or moving into other locations.
In a world in which people can readily and easily move between sectors and find reemployment where they're in a sort of a frictionless labor market, a shock of this magnitude might've lowered wages a little bit for low-skilled relative to high-skilled workers, but it might've not been that big a deal.
But because people don't just flow into a new job, and people don't move to a better place immediately, and so on, we saw very sharp increases in unemployment and non-participation — people dropping out of the labor market — and we saw them moving on to public benefits programs like disability and early retirement, increased use of Medicare and Medicaid, of SNAP [food stamps], of TANF [welfare].
So what we really gained a different appreciation of was how costly this was at the level of individuals and communities. It doesn't mean the aggregate gains aren't positive, but the thing is the gains are very diffuse and small at the individual level. Your and my cost of living might be a couple hundred dollars a year lower because of China, but you'd hardly notice that. But the losses are extremely concentrated.
Why was this work such a big deal in the field of economics, and what are its implications for how we understand trade policy?
I don't want to claim it was such a big deal, but it got a lot of people's attention because it was definitely not consistent with our received wisdom — that trade was almost a free lunch. Economists don't really believe in free lunches, but we're going to say some things look a bit like a free lunch. Trade is a lot like a technological improvement: It allows you to produce more goods with the same amount of labor by reallocating to the things you're good at and trading with other people for the things you're bad at.
This study pushed really strongly against that received wisdom that people can costlessly move from sector to sector (although we knew it could cause a net reduction in wages for low-skilled workers). But that's the best-case scenario. It turns out the real world is not that close to that best-case scenario. People don't move really readily; they have skills that are specific to their industry, they have attachments to their jobs, it's wrapped up in their identity. And then the shocks, because they're so geographically concentrated, they're highly, highly disruptive.
It also makes you think, what programs do we have to help people adjust to these shocks?
Well, we have unemployment insurance and trade adjustment assistance. We showed those things respond, but those things are chump change relative to the other programs that are affected, like disability, like Medicare and Medicaid, like TANF and SNAP. And so the labor market programs are only a tiny fraction, maybe 10 percent of all the public benefits transfers that are going on as a consequence of these trade shocks.
You've also worked on a number of other papers that explore [how] the China trade shock has affected more than just jobs.
There are three other directions that we've taken this work beyond looking at labor markets. One is looking at the broader change in families and how shocks to manufacturing affect men's relative to women's earnings and the availability of marriageable men — and ultimately family formation and children's living circumstances.
We show it's a little bit like the Hillbilly Elegy narrative. You see these shocks that reduce the earnings of relatively low-earnings men and relatively low-earnings women, and they reduce fertility, they reduce marriage formation, but they increase the fraction of kids born out of wedlock and to teens, and ultimately increase the fraction of kids living in poverty. So this is really a story of how the labor market affects all the other decisions people make.
A second direction has been to look at political consequences and ask whether areas that were particularly exposed to these shocks deviated in terms of the type of people they were electing to office. We find that a lot of the extremely conservative Republicans have been elected in areas that were exposed to these shocks that occurred in the 2000s.
It's not so much that it causes a change in party as much as it causes a change in the political identity of the officeholders, so moderate Republicans are replaced by extremely conservative Republicans. Also, in a subset of areas that are more left-leaning to begin with, you see moderate Democrats being replaced by liberal Democrats.
We also trace that through to the general election and do find that if you compared 2000 to 2016 or 2008 to 2016, the gains were significantly larger for Republicans than you would expect in areas that were more affected by the trade shock. So it appears to have contributed — and I think this is plausible — to the election of Donald Trump. Our estimates suggest actually it was enough to swing several of the swing states.
So Trump was onto something?
He's certainly was onto something. It's bigger than just trade, however. He's really onto the fact that things have just been bad for non-college-educated workers, but especially non-college-educated men in the United States, since Ronald Reagan took office. Their wages have basically been falling or plateauing for 35 years, and their job stability has declined. The China shock was just another kick in the teeth for a group that had been in decline for a long, long time.
You were going to mention a third effect of increased trade with China.
The third branch we took was to ask about innovative activities. There’s two scenarios that can play out. One is where trade increases competition and causes firms to innovate, and there’s another in which trade inhibits investment in innovation because either a) you're just squeezed too hard, you just can't afford it, even if it would be profitable to do in the long run, or alternatively b) because the market has become so hypercompetitive there's no competitive advantage to be gained by innovating. Both are theoretically possible.
We used Compustat data, which covers large, publicly held firms, and looked at sectors that become much more competitive as a result of China's rise, and we find a pretty sharp fall in the intensity of new patent creation in those sectors as well as declines in research and development and profits. And so our evidence for the US suggests that at least in that period, the rising competition likely caused a reduction in innovative output. And that's problematic because 70 percent of all patenting activity and research and development expenditure in the US is in manufacturing, believe it or not.
What do you think about Trump’s trade vision, which blends closing ourselves off from the world to some degree with scaling down trade commitments?
It's extremely naive and uninformed. I don't think it has any basis in economic reasoning about the costs and benefits of trade. I think he is a pure mercantilist — he simply thinks exports are good, imports are bad.
I think the idea of slapping large tariffs, or border taxes, on imports is a very destructive idea on all kinds of fronts. I think tearing up the Trans-Pacific Partnership was an incredibly shortsighted decision; the country that most benefited from us tearing up the TPP was China. They were not a signatory of the TPP, and they didn’t want it enacted because it was meant to basically prevent them from setting the rules of the game in Asia. Now that's exactly what they will do.
So what are the underexplored solutions to trade shocks?
One would be to strengthen trade adjustment programs. You would offer more generous benefits that are easier to access or longer-lasting and help people transition to other sectors. For example, you can't use our current trade adjustment assistance program unless you're in school.
Maybe we should just give people a lump sum for a while to help ease the pain of switching sectors. Say I was at a $25-an-hour job, but it's gone, and now there's a $15-an-hour job available, but I don't want to take that job because then I’m locking in a lower rate of pay. The government could say, look, we're going to make up two-thirds of the difference for the first year, 50 percent of the difference for the second year. You can use that to start working again, and then you can keep looking for a better job. Or maybe you'll conclude that this is the best one you're going to get, but at least you're not hung up waiting for that $25-an-hour job that isn't going to ever reappear. That's called wage insurance.
We could also change our tax system in a way that is more like the value-added tax, that treats imports and domestic products more symmetrically.
We should also think about how we have a strategic interest in some sectors that we should not ignore. And this is somewhat heretical. But, for example, take robotics. Robotics is going to be a huge economic activity for the next 30 years, 20 years, 10 years. A lot of the great robotics technology has come out of the US; a lot of it started here. But we're not making anywhere near the type of investment that China is with state-sponsored support, or even Germany and Switzerland are. We know for sure that 20 years from now we're going to be buying lots of robotics, and the question is: Are we going to be buying them from US producers or buying them from China?
A lot of our innovation actually comes from government investment — from the military, from the National Science Foundation, from the National Institutes of Health. But it is definitely withdrawing, and if Trump gets his budget, unless you're making a bomb, you won’t be getting support anymore for research, and that's a very shortsighted decision.