The gains from falling U.S. consumer prices due to increased trade with China could be used to compensate those in the U.S. effected by job losses, according to research from the London School of Economics and Political Science (LSE) and the Federal Reserve Board.
The paper finds the price effects of trade with China were substantial and largely beneficial to U.S. consumers, and could help mitigate the effects of the “China shock”, where the impact of rising Chinese exports to the U.S. has negative consequences for U.S. employment levels, particularly in manufacturing.
The authors of the paper studied the price effects of trade between the U.S. and China using comprehensive price data from the Bureau of Labor Statistics between 1991 and 2007. The researchers estimate that a one percentage point increase in imports from China to the U.S. causes a 1.91 per cent decline in consumer prices. The authors note the drop in consumer prices was larger for products catering to low-income consumers.
These estimates suggest that trade with China increased U.S. consumer surplus - where the price consumers pay for a product or service is less than the price they are willing to pay - by around $400,000 for each U.S. job lost due to trade.
In the paper the authors write: “We find that falling prices in product categories that are more exposed to trade with China increase consumer surplus by several hundreds of thousands of dollars for each displaced job”
Increased trade led to falling domestic prices, even for domestically produced goods, driven by intensified competition and smaller profit margins: “by disrupting domestic market power, trade can have substantial price effects that benefit consumers.”
“The large magnitude of the price effects suggest that it may be possible to compensate those who suffer from the labor market impacts of trade shocks.”
Dr Xavier Jaravel, Assistant Professor of Economics in the Department of Economics at LSE and co-author of the research, said: “In practice, compensating the exact individuals who lost their jobs because of trade may be challenging as it requires policy makers to find and implement the proper policies to redistribute the gains from the winners to the losers.
“But our results indicate that there is much room to organise such transfers, because the consumer gains are large. For example, support for displaced manufacturing workers could potentially be achieved through job training, relocation allowances or income support within federal programs such as the Trade Adjustment Assistance.”
Eric Sager, Senior Economist at the Federal Reserve Board, said: "Influential work documented that U.S. labor markets were heavily disrupted by the surge of imports following China’s joining the WTO in 2001. But because of data limitations, much less is known about the extent to which the “China shock” may have benefited U.S. consumers by reducing prices and thereby increasing their purchasing power. We fill this gap by analysing comprehensive price data on hundreds of thousands of products."