Did Trade with China Make U.S. Manufacturing Less Innovative?16 December, 2016 / Articles
In early 2016 economists David Autor, David Dorn, and Gordon Hanson published an influential paper that highlighted some of the costs of global trade. They reviewed the literature and reported that trade with China had cost the U.S. as many as one million manufacturing jobs since 1999, had lowered wages, and had not led to the new jobs and industries that trade proponents had promised.
The main case for trade, though, was always that it would improve overall welfare by allowing a greater variety of products to be produced more efficiently. China might focus on producing labor-intensive goods, but the U.S. would shift toward work that was more valuable and innovative. If trade’s “winners” compensated the “losers,” everyone could benefit.
On Monday the same trio of economists published a paper, with coauthors Pian Shu and Gary Pisano, that complicates this story. Was increased trade with China really pushing U.S. companies to become more innovative? For manufacturers, at least, they found that the answer was no. In fact, the relationship went in the opposite direction: U.S. manufacturers exposed to competition from Chinese imports became far less innovative.
The researchers looked at trade data from 1991 to 2007, during which time China became a global manufacturing powerhouse. They measured how varying levels of exposure to Chinese imports affected U.S. manufacturers’ performance and patenting. Competition with China was associated with decreased performance on several measures. “Aggregate firm sales revenues, employment, available capital, market valuation, and investments in new technology have diminished as competitive conditions have tightened, thereby contributing to diminished profitability,” the authors wrote. These effects held up after controlling for numerous other variables.
The first takeaway from this paper is that more competition, from trade or otherwise, doesn’t necessarily lead to more innovation. While competition can force firms to innovate to fend off rivals, it can also cut profit margins, leaving companies with less to invest in research and development. A widely cited paper from 2002 posited an inverted-U relationship between competition and innovation: Too little competition, and firms won’t bother to innovate; too much, and they won’t be able to afford to.
The second takeaway, which is trickier, concerns the relationship between trade and innovation. Is it possible that trade has hurt rather than bolstered American innovation? The research literature is mixed. There’s evidence that European manufacturers became more innovative in response to competition from China, for example, but also that Canadian manufacturers became less innovative. It’s possible that this difference corresponds to the inverted-U. Because manufacturing prior to China’s rise was more competitive in the U.S. than in the EU, trade with China could have pushed the U.S. onto the too-much-competition side of things while spurring European manufacturers to become more innovative.
And the new U.S. evidence is only looking at innovation in manufacturing. It’s possible that other U.S. industries became more innovative, thanks to cheaper inputs made possible by trade. “I have no reason to think that globalization reduces innovation in net [worldwide],” Autor told me, but he emphasized that manufacturing plays an outsize role in U.S. innovation. As he and his coauthors write in the paper, “Manufacturing still generates more than two-thirds of U.S. R&D spending and U.S. corporate patents despite accounting for less than one-tenth of U.S. private non-farm employment.”
It’s hard to say exactly what this new evidence means for the overall case for global trade, and the authors caution against overgeneralizing the result. Most economists believe that trade is beneficial in the long run, but long-run prosperity depends heavily on innovation. If this new paper shows anything, it’s that we can’t just assume that more competition and open markets will deliver new ideas. Under the right circumstances, they can. But if they squeeze entire industries’ ability to invest or make it easy to rely on cheap labor rather than technology, the result could be less innovation, rather than more.