"It's not quantity, inequality, or the trade deficit. It's price."

by
Danny Quah
Aug 2024

To assess the "China Shock"---the impact of trade with China on the US economy and thus US geopolitical disaffection against China---researchers and policymakers typically look at the quantity of imports or the size of trade deficits. The peculiar thing, in my view, is that none of those variables actually affects the individual worker, even if they are immensely important to policymakers and politicians.

Instead, what matters to the worker is price: What happens to the price of what I consume, what happens to the price of what my industry sells? What is the behaviour of import prices in the US? Do Canadian and Mexican imports also produce a "Canada Shock" and "Mexico Shock"?

The Figure shows how, over 2003-2024, imports from Canada and Mexico have risen in price steadily, to where Canadian imports have actually outpaced the US Consumer Price Index. However, imports from China, even with the shift from low-quality textiles to high-value machinery, have had their prices exactly flat. This shows how US consumers have benefited and how China imports have helped keep down US cost of living, but for the US worker in those same industries, they naturally enough think of China stealing their jobs, dismantling their industry, and turning into ghost towns what were once thriving middle-class communities. While prices in the US have risen 65% over these two decades, China import prices have remained pretty much unchanged.

I'm not saying it's not quantity, it's price. I'm saying whatever might be going on with quantity, price definitely matters.

Quah, Danny. 2024. "Correlated Trade and Geopolitics Driving a Fractured World Order" LKYSPP Working Paper (Aug)

https://dannyquah.github.io/In-progress.html#correlated-trade-geopolitics