How China is fighting inequality — in the United States

October 22, 2012

A worker at a Chinese textile plant / Reuters

You can be pretty confident that U.S.-Chinese trade relations will come up in Monday night's foreign policy debate, and in particular the effect that China's exports have had on the American economy. Both candidates have expressed a desire to crack down on Chinese trade practices. Republican presidential nominee Mitt Romney says that if elected he'll label China a currency manipulator on the day he takes office. President Obama's administration has filed trade enforcement cases against China and has proposed tax breaks for U.S. manufacturers who export overseas and who have lost a fair number of jobs to consumers' preference for lower-cost goods from China.  

Some economists argue that U.S. manufacturing workers who have been displaced by cheaper imports from China wind up taking lower-paying jobs elsewhere, thus causing an overall reduction in middle-class wages. But others take another view: The benefits to the U.S. economy of Chinese exports actually outweigh the costs. And many of those benefits, they say, go to the worst-off in America.

Christian Broda and John Romalis at the University of Chicago tried to estimate how Chinese exports have affected the cost of living of poor Americans.* They note that the kind of non-durables goods that China has exported in such great numbers — clothing, textiles, paper products, etc. — make up a much bigger share of poor Americans' spending than of rich Americans' spending. Given those differences, from 1994 to 2005, inflation among poor U.S. households grew 6 percentage points slower than among rich households.

The result was that imports from Chinese reduced economic inequality in the United States by 5.5 percent -- according to Broda and Romalis. In other words, inequality rose 28 percent less than it would have without those cheaper Chinese exports from 1994 to 2005.

This isn't a big surprise. A famous study by Jason Furman, now the number two official on Obama's National Economic Council, argued that Wal-Mart's cheaper prices significantly improve the living standards of poor Americans, equivalent to a 6.5 percent increase in income. But debates over trade policy often center on benefits to corporate fat cats who relocate their factories overseas to take advantage of cheap labor. Maybe the discussion should instead focus on how Chinese exports are helping America's working poor.

* Hat-tip Charles Kenny.

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