While economists are generally unanimous that free trade is a win for all countries involved, it’s often hard to connect that effect to specific liberalizations. Indeed Columbia’s Jagdish Bhagwati, one of the best-respected trade economists currently working, has gone so far as to argue that high-profile free-trade agreements such as NAFTA are actively harmful to the goal of liberalized trade.
But a new working paper from the Fed’s Justin Pierce and Yale’s Peter Schott argues that the 2000 granting of permanent normal trade relations (PNTR) to China was the rare high-profile trade deal that really mattered. PNTR did not actually involve much in the way of new tariff reductions, but what it did offer was certainty. It suggested that previously eliminated tariffs on Chinese goods weren’t coming back anytime soon.
That reassurance, Pierce and Schott argue, mattered a great deal. All told, they argue that employment in the manufacturing sector in the United States was 29.6 percent lower than it otherwise would have been absent PNTR. That means that employment in that sector would have grown — by close to 10 percent, Pierce and Schott estimate — as opposed to shrinking considerably, as it actually did. It presumably would have grown even more in the absent of other, non-PNTR liberalizations, such as China’s admission to the World Trade Organization. The effect was four times as strong for production-line workers as for non-production workers, which is in line with the usual finding that the losers from trade tend to be low-skilled workers in rich countries.
Interestingly, much of the negative effect on manufacturing employment came not from actual job losses but from the absence of job growth that would have been expected without the agreement:
This obviously doesn’t constitute an open-and-shut case against PNTR. It could still remain the case, as free-trade advocates argue, that it helped productivity and growth in the United States overall, and many of the Chinese workers who gained from the shifting of manufacturing energy over there were escaping truly desperate poverty. But it does suggest that trade liberalization, and with China in particular, is a big reason for the decline of American manufacturing jobs.