Reciprocity and the China Shock
We formalize the GATT/WTO principle of reciprocity in workhorse quantitative trade models, characterizing reciprocal tariff cuts that hold terms of trade fixed and investigating their labor-market impacts. We provide closed-form expressions mapping reciprocal tariff cuts to labor market dislocation. We demonstrate 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. Applying our theoretical results to China’s 2001 WTO accession, we find that China’s tariff reductions exceeded reciprocity norms, increasing real incomes but amplifying the manufacturing employment dislocation – the China Shock – in the United States and globally.
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