Will Silicon Valley go the way of Cleveland?

Teschler on Topic

Leland Teschler • Executive Editor

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Students of economics will probably recall hearing in class that free trade lets countries specialize in what they do best, boosting income everywhere and creating gains for winners that exceed losses for losers.

Fundamental to the free-trade theory is that workers who lose a job because of foreign competition will move immediately to where there are jobs. And after a brief transition, all workers with the same skills will earn the same.

Perhaps because of the current political environment, it is only recently that economists have seriously studied the flaws in this argument for free trade. One problem pointed out by M.I.T. economists Abhijit Banerjee and Esther Duflo is that labor markets tend to be sticky. Many people don’t move even when their jobs disappear. When trade brings competition from imports, wages may go down instead of up because workers, managers, and capital investment are all slow to shift away from old ways of doing business.

Economists who first pointed out this ambiguity got a lot of trash talk from free-trade advocates. But the evidence of harm from imports is mounting. Recently, for example, economists David Autor, David Dorn, and Gordon Hanson documented the downside of imports into the U.S. They looked at American locales producing goods that China had been particularly successful at exporting. No surprise, those areas saw big declines in manufacturing employment. But there was also no reallocation of labor to new kinds of jobs. The total number of jobs lost often far exceeded those in the affected industry itself. Moreover, workers typically didn’t move to neighboring areas that were unaffected by the import boom. People simply had no work.

The damage is exacerbated by the tendency of industries to cluster in geographical regions. When the industry unravels, the surrounding area can become a ghost town.

A particularly distressing example is that of Bruceton, Tenn. which had been home to several makers of jeans, suits, and pajamas. A 2015 piece in The Atlantic chronicled what happened when those industries moved to China in the 1990s. The Bruceton area still hasn’t recovered. The factories are long gone but so is a bank, supermarkets, and other retail stores. And efforts at attracting other industries face an up-hill battle. Local politicians say businesses that scout the area for locating new facilities often take one look at the empty businesses on Main Street, find the whole scene depressing, and head elsewhere.

The irony is that all this pain might not be worth the gain. Say Banerjee and Duflo, “There is something economists do know but tend to keep closely to themselves: the aggregate gains from trade, for a large economy like the U.S., are actually quantitatively quite small. The truth is, if the U.S. were to go back to complete autarky, not trading with anybody, it would be poorer. But not that much poorer.” One point in favor of this argument: Despite what you might think by looking at the shelves of Walmart, only about eight cents out of every dollar spent in the U.S. is spent on imports.

This is a point to keep in mind as the U.S. grapples with trade issues surrounding such high-tech items as 5G telecom equipment. The geographical area perhaps most at risk for these industries moving off shore is Silicon Valley. To see what might happen there, consider the events surrounding Cleveland, Ohio. That city rose to prominence after the American Civil War, doubling its population, and fostering an industrial vibrancy founded largely on the growing steel and automotive industries. When steel and auto plants began moving overseas, the city’s fortunes dramatically waned.

If U.S. high-tech industries go the way of steel and automobiles, the most appropriate phase for Silicon Valley might be, “Welcome to being Cleveland.” DW