The international trade and investment program.

• Author: Feenstra, Robert C.
• Position: Program Report

The rise in exports from China has been one of the most significant events in international trade in recent decades. This trend has accelerated since that country's entry into the World Trade Organization (WTO) in 2001. Even before that date, by a vote of the U.S. Congress China received the low-tariff, most-favored-nation status associated with WTO membership each year. But with WTO membership, Chinese firms experienced a reduction in the uncertainty associated with the outcome of that vote. This contributed importantly to the surge in exports to the United States, according to studies by Justin Pierce and Peter Schott and by Kyle Handley and Nuno Limao; their hypothesis is supported by empirical work by Ling Feng, Zhiyuan Li, and Deborah Swenson. (1)Pierce and Schott observe that the surge in Chinese exports to the United States coincides with a substantial decline in U.S. manufacturing employment. Handley and Limao find that the welfare gain for consumers due to this increase in Chinese imports is of the same order of magnitude as the U.S. gain from new imports in the preceding decade. These initial findings highlight the dual role that Chinese imports play for the United States: on the one hand, they create import competition with associated labor-market dislocation; on the other, they benefit U.S. consumers.

The first of these roles is explored in a series of papers by David Autor, David Dorn, and Gordon Hanson. (2)They analyze the impact of Chinese import competition between 1990 and 2007 on local U.S. labor markets, exploiting geographic differences in import exposure that are due to initial differences in industry specialization. Higher exposure increases unemployment, lowers labor force participation, and reduces wages. [See Figure 1, at right] At the aggregate level, a conservative estimate is that the import surge accounts for one-quarter of the decline in U.S. manufacturing employment. The regional concentration in the decline in manufacturing employment is inconsistent with some alternative explanations of this phenomenon, notably the possibility of a systemic technology shock. (3)The trade effects on unemployment are confirmed by examining worker-level evidence. (4)Most recently, in joint work with Daron Acemoglu and Brendan Price, these authors find that the import surge from China also contributed to unusually slow employment growth in the United States following the global financial crisis and the Great Recession. (5)

While these papers have explored the impact of import competition from China, they do not incorporate the consumer gains or the export opportunities created by expanded Chinese exports. The first attempt to put the surge in Chinese exports into a general equilibrium context is that of Lorenzo Caliendo, Maximiliano Dvorkin, and Fernando Parro. (6) Their computable general equilibrium model incorporates labor mobility frictions and dislocation costs. They find that growing Chinese import competition resulted in a 0.6 percentage point reduction in manufacturing's share of total employment, or approximately one million jobs lost, which is about 60 percent of the change in manufacturing employment not explained by a secular trend. At the same time, the China shock increased U.S. welfare by 0.2 percent in the short run and 6.7 percent in the long run, with very heterogeneous effects across labor markets. Despite the fact that employment impacts and labor market dislocation are much stronger in some areas, the consumer gains and export opportunities mean that nearly all regions experience net benefits from rising Chinese imports.

This work has inspired much additional research on the China shock. In the United States, Avraham Ebenstein, Ann Harrison, and Margaret McMillan analyze the impact of globalization at the occupational level and find that offshoring to low-wage countries and imports are both associated with wage declines for U.S. workers, though imports from China have a greater impact than does offshoring. (7)In France, analysis by James Harrigan, Ariell Reshef, and Farid Toubal concludes that increased polarization of the labor market is associated more with technological change than with imports from China. (8)In Denmark, Wolfgang Keller and Hale Utar find that import competition from China is an important cause of job polarization, with about four times the impact of offshoring. (9) They confirm a strong role for technical change and computerization in leading to polarization, but find that these factors cannot explain the rise in low-wage employment up to the early 2000s.

[FIGURE 1 OMITTED]

Global Supply Chains and Wage Inequality

A great deal of work in the International Trade and Investment Program deals with multinational firms, their global sourcing decisions, and wage inequality. Understanding which countries a company chooses to use for offshoring is a challenging theoretical problem. In the presence of fixed costs of procurement, that problem is inherently discrete in nature, since the firm must choose zero, one, two or more countries to which to outsource. Pol Antras, Teresa Fort, and Felix Tintelnot develop a method to analyze the outsourcing problem as though firms were choosing a continuous rather than a discrete outcome, and they apply it to firm-level U.S. data. (10)They study the implications of a hypothetical 100 percent increase in China's sourcing potential, such as could be produced by a reduction in bilateral trade costs between the U.S. and China. They find that such a shock tends to create gains by decreasing the equilibrium industry-level U.S. price index, even while some U.S. final goods producers exit the market. Other U.S. firms choose to source from China as a result of the shock, and these firms on average also increase their input purchases from the U.S. and other countries. Greater sourcing by U.S. firms from China can lead to enhanced demand for local inputs, too, as these firms grow.

In other work, Antras and Davin Chor analyze offshoring using a property-rights model of the firm. (11) They consider a continuum of production stages, where at each stage a final goods producer contracts with a distinct supplier for a customized, stage-specific component. They show that the incentive to integrate suppliers varies systematically with the relative position--upstream versus downstream--at which the supplier enters the production process and that the nature of the relationship between integration and "downstreamness" depends crucially on the elasticity of demand faced by the final goods producer. Using the U.S. Census Bureau's Related Party Trade database, they find empirical evidence broadly supportive of these predictions. In work with co-authors Laura Alfaro and Paola Conconi, they provide further evidence supporting this theory of offshoring using data on the production activities of firms operating in more than 100 countries. (12)These papers build on work by Antras and Chor with co-authors Thibault Fally and Russell Hillberry which measures the "upstreamness" of production and trade flows. (13) Fally and Hillberry further build on these insights to provide their own Coasian model of international production chains. (14)

The linkage of wage inequality to global supply chains is studied in a theoretical model by Arnaud Costinot, Jonathan Vogel, and Su Wang, who find that the emergence of these chains has opposite effects on wage inequality for workers employed at the bottom and the top of the chains, thereby generating wage inequality across sectors. (15) A more detailed, empirical examination of inequality in the United States, which focuses on inequality between groups of workers, such as those of high and low skill, is done by Ariel Burstein, Eduardo Morales, and Vogel using an assignment framework with many labor groups, equipment types, and occupations. (16) Elhanan Helpman, Oleg Itskhoki, Marc-Andreas Muendler, and Stephen Redding drill down further to examine inequality across firms within sector and occupation for workers with similar observable characteristics. (17) Their model allows for heterogeneity across firms in the cost of screening workers and in the fixed cost of exporting. They show, using Brazilian data, that residual wage dispersion between firms is related to firm employment size and to participation in trade. Other work linking the regional skill-premium in Brazil to trade liberalization is provided by Rafael Dix-Carneiro and Brian Kovak. (18)

These papers rely on matching models between heterogeneous firms or managers and heterogeneous workers with complementary abilities. This type of model is developed by Gene Grossman individually and in work with Helpman and Philipp Kircher. (19) To study the implications for income distribution...