Has International Trade Caused Rust Belt Collapse?

The New York Times has published a tough piece by Oren Cass where he argues that economists deserve some blame for teaching millions of Econ 101 students to embrace free trade. He argues that there are millions of American workers and small towns who have lost out because of free trade with nations such as China.

Among economists, many point to this paper’s empirics that broadly speaking supports this claim.

Autor, David H., David Dorn, and Gordon H. Hanson. "The China syndrome: Local labor market effects of import competition in the United States." American economic review 103, no. 6 (2013): 2121-2168.

Few economists are aware of this paper that questions this general claim.

Wang, Zhi, Shang-Jin Wei, Xinding Yu, and Kunfu Zhu. Re-examining the effects of trading with china on local labor markets: A supply chain perspective. No. w24886. National Bureau of Economic Research, 2018.

I want to pivot and focus on this comment posted on the Internet as a response to Oren Cass. Bette is Brilliant! This quote is so interesting.

Bette is telling a story of the failure of people who live and work in small towns to adapt to the rise of Superstar Firms. As Barnes & Noble, Walmart, Starbucks, and Amazon entered and competed with incumbent firms, the “Big Boys” won the consumer competition with higher quality products and lower prices. These small town firms retreated and went out of business. Bette is telling a story that there is a negative externality here that the towns lost their vitality as this dynamic product market competition played out.

What does the urban economist conclude here?

For me to offer a serious answer, I need to know more. For the local coffee shop that went broke when Starbucks came to town, did that boss move away? What new business did he/she try to open? What was the scrap value of the equipment and inventories that she had? Did regulatory barriers limit her ability to open a new business? Or was she weighed down by debt and bankruptcy proceedings as she failed to adapt to the challenge of Chain entry in her area?

What role does our educational system play here? For the workers at local manufacturing firms who were displaced due to export competition, what skills did they have that could be used in other industries and occupations? How industry and firm specific were their skills?

If our public education system was of higher quality, would the China Trade Shock and the entry of Superstar retail firms have had a smaller impact on disrupting communities? Who has the personality and the training to cope and thrive in the face of economic upheaval?

Elected Democrats such as Bill Clinton often spoke about retraining and the role of government in supplying such retraining programs. If our workforce was well educated when young, would such individuals be able to more quickly acquire the skills they need in a changing workforce?

Please do not read this Substack as saying that I”m “blaming the victim”! Instead, I want to suggest that the effects that critics such as Cass are pointing out emerge in part because of the failure of our public education system to create a set of working adults who can cope with change.

There are other factors such as American Unions, energy pries, environmental laws and land use zoning rules that limit the ability of manufacturing firms to pivot. These factors are discussed in my 2013 paper.

Kahn, Matthew E., and Erin T. Mansur. "Do local energy prices and regulation affect the geographic concentration of employment?." Journal of Public Economics 101 (2013): 105-114.

Why Don’t Displaced Workers Move to Opportunity?

Where Oren Cass is correct is that modern economists do believe that resources (both capital, people, natural resources such as water and land) migrate to their highest and best use. So, if urbanites value a gallon of water at $100 while farmers value that gallon at $2, then the farmer should sell that water to the urbanite.

In a similar sense, consider Springfield, Illinois. Back in 1929, this Pillsbury factory opened up. In 1950, it employed 1500 people.

By 2008, it closed.

Is Oren Cass saying this plant would be still open and operating if the U.S engaged in no international trade?

For the 1500 adults who worked there in 1950, what became of their children and grandchildren? How many of them live in the area? I can see that this rusting piece of old capital would be ugly, polluting and costly to remove. There are interesting issues of how areas finance the removal of outdated capital to create “green fields” to allow new economic activity to take root.

At the end of the day, what “rules of the game” promote improvements in American quality of life? What role does openness (the migration of ideas, goods, capital and labor) play in improving our quality of life?

If American customers want to contract with other people in other nations, should our government put a tax on such trades? What competition is fair and what competition is “unfair”?

Oren Cass is making an implicit property rights argument that American factory workers have the right to continue to do their jobs and to be paid a good wage even if consumers want to substitute to other products. Cass does not explain why he believes workers need this “protection” against competition. What is the root source of our inability to compete? He may say that the reason our workers can’t compete against world exports is because the rest of the world is so poor. He wants to raise prices that American consumers pay in order to pay American workers more for work other people can more cheaply do.

This is an important debate but let’s end with opportunity cost. Why don’t the Americans who lose their factory jobs have other even more fulfilling jobs they could do? Why are so many Americans apparently unable to pivot when economic circumstances change?

Now, one argument that urban economists make is that as we age we plant roots as our kids are happy in their schools with their friends. As we plant roots, we are making a bet on a place having a bright economic future. Many families buy homes in such places and thus they “double down” as they live, work in own in the same area. If the place enters economic decline, then many are stuck there. Their mortgage payments may lock them in. Are such individuals “victims”?

The rise of WFH actually helps workers to adapt to this possibility if hybrid/WFH workers can live in an area where they have roots but telecommute to work for a firm in another location.

Finally, returning to the defunct Pillsbury Plant in Springfield, my open question relates to whether new manufacturing firms even consider opening up in Springfield. How do such prospective migrants rank Springfield relative to other locations? What can Springfield do to be more competitive to attract such new factories? Ideally such cities engage in this competitive analysis without seeking Federal subsidies for “green jobs” or other subsidized activity. How do places that seek to attract more employers compete? Why isn’t this process helping areas to rebound faster? Is China really to blame for all of this dynamic?