TRADE: Reciprocity and the China Shock; Professor Lorenzo Caliendo (Yale University)

Abstract

The principle of reciprocity plays a central role in GATT/WTO market access negotiations. Motivated by the widespread belief that China has not abided by the norm of reciprocity since joining the WTO in 2001, and by the large loss of manufacturing jobs experienced by the United States after China’s WTO accession - the “China Shock” - we investigate the link between reciprocity in tariff negotiations and the magnitude of the labor-market adjustments that can be expected to arise under tariff negotiations that conform to reciprocity. In the canonical two-good two-country neoclassical trade model that has helped to illuminate the economic logic of many of GATT’s design features, we show that a country’s own tariff liberalization is a sufficient statistic for the labor-market adjustments it can expect from tariff negotiations that satisfy reciprocity. We then demonstrate that this property extends to a number of workhorse quantitative trade models where we can provide closed-form expressions for the mapping between reciprocal tariffs and labor market dislocation, and we apply our theoretical results to guide a quantitative evaluation of reciprocity in the context of China’s 2001 accession to the WTO, focusing on how deviations from reciprocity may have impacted the extent of employment dislocation in the United States and globally. Our findings indicate that China did indeed fail to deliver reciprocity, but that in fact the tariff reductions that it implemented after its accession to the WTO exceeded the norm of reciprocity. This deviation from reciprocity increased aggregate real incomes in the United States and in the rest of the world through the channel of terms-of-trade improvements, but it also contributed to the magnitude of the China Shock experienced by the United States and other countries.