Trade imbalances affect employment response to global shocks

Stacked shipping containers, various

Trade economics research has focused extensively on trade shocks, especially the so-called China Shock of increased Chinese exports in the 2000s. Often, however, that research has ignored trade imbalances, according to a new paper, and those imbalances can have big effects on jobs.

The paper, “Globalization, Trade Imbalances and Labor Market Adjustment,” finds that when trade is imbalanced, it makes a difference in how countries reallocate jobs in response to a global trade shock. The research was supported by an Upjohn Institute Early Career Research Award.

Trade shocks cause countries to adjust their workforces, shifting workers from one sector to another. These shifts take time and unemployment increases as workers try to match with new employers.

Imbalanced trade creates surpluses for some countries and debts for others. Repaying those debts upends the labor market again, as countries that shifted employment from export industries shift back toward those industries.

The paper puts the China Shock in a new light. While China’s boost in manufacturing for export contributed to the decline in the U.S. manufacturing sector, other sectors grew in response, cushioning the effect on U.S. unemployment.

Interestingly, the paper finds that global shocks, not just China’s ascent, influenced the U.S. trade deficit in the 2000s. The authors modeled a much smaller boom for China, first supposing that the Chinese savings surplus was no bigger than the rest of the world's, and second supposing that there was no Chinese savings surplus at all. They found in the first case that the U.S. trade deficit did not change, and in the second that the U.S. trade deficit would have been smaller in the short run but larger in the long run.

The paper authors are Rafael Dix-Carneiro of Duke University and NBER; João Paulo Pessoa of the São Paulo School of Economics, Ricardo Reyes-Heroles of the Federal Reserve Board and Sharon Traiberman of New York University. Traiberman received an Early Career Research Award for the project.

Research Topics: Globalization