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“The China Shock” Revisited

by Greg Rosalsky

By now, many economists are hoarse screaming that higher tariffs and a trade war will raise prices and hurt the American economy.

But many Americans aren’t listening. A recent poll by Quinnipiac University, conducted in late January, found that 42 percent of Americans believe tariffs will actually help the American economy. Our recent history with free trade might help explain the disconnect between economists and a large swath of the American public.

For decades, mainstream economists claimed that free trade would be a clear win for America. Sure, they said, there would be some losers. But those losers would get new jobs in a growing economy and basically everything would ultimately be fine.

Everything turned out not to be fine. No research has made that more abundantly clear than a series of studies over the last decade-plus on the so-called “China Shock.” The shock refers to what happened to American communities after China joined the World Trade Organization in 2001. These studies have found that, as a flood of Chinese imports came rushing into America, it destroyed well over a million manufacturing jobs and created basically miniature depressions in communities around the country. Contrary to the assumptions of old-school economists, manufacturing workers struggled to adapt and move to new jobs in the aftermath.

Spearheaded by economists David Autor, David Dorn, and Gordon Hanson, the research project on the China Shock has led to a big reevaluation of trade policies in econ wonk circles.

Back in 2011, when the economists first began unveiling their research, one of their big, eye-opening findings was that, for displaced workers, “the adjustment process was wrenching, slow, and scarring,” says Autor, an economist at MIT. That was not like classic economic theory, “where you lose one job and you get another almost equally good job at another firm.”

The economists, and others in their wake, also found that the broader communities hit by the China Shock suffered enormously. They saw higher unemployment rates. They saw declines in wages and upward mobility. They saw an explosion in the use of welfare programs. And they became plagued by social ills, from higher rates of child poverty and single parenthood to an increase of deaths from drugs, alcohol, and suicide.

The China Shock research has helped convince more economists and policymakers to begin supporting greater government intervention in markets, like strategically using tariffs and subsidies to boost certain industries (so-called “industrial policy”), and “place-based policies,” which take special measures to help left-behind communities succeed.

Last week, the economists published a new installment in their series (this time Autor, Dorn, and Hanson are joined by co-authors Maggie Jones and Bradley Setzler). Equipped with even better, more precise data — and the benefit of being able see what happened to these communities with the greater passage of time — the economists take another look at the aftermath of the China Shock. Their analysis goes through 2019, the eve of the pandemic.

The economists look at the effects of the China Shock from two different angles: how it affected places, and how it affected people. They find that, on metrics such as employment rates, the places hit by the China Shock mostly recovered by 2019. A different set of industries rose in the ashes of manufacturing, offering residents jobs at places like Big Box stores, restaurants, schools, and healthcare facilities.

But, the economists find, the people who were hurt by the China Shock did not recover. Manufacturing workers did not transition to these new sectors. The economists find that the people who took the new jobs, concentrated in the service sector, were often newcomers and demographically different, including immigrants, US-born Latinos, and younger workers with college degrees. Meanwhile, the ladders in manufacturing that once provided workers without a college diploma a solid wage and upward mobility were kicked over. The research on the China Shock already illuminated why so many Americans have been swayed by President Trump’s brand of populist, nativist politics. This new installment is even more eye-opening on that front.

So why did economists get free trade so wrong? And could tariffs help? We asked David Autor.

Narumon Bowonkitwanchai/Getty Images

Some Reasons Why Economists Blundered On Free Trade

In their new study, the China Shock economists throw a bit of shade on the economics profession for getting the effects of free trade so wrong in the past. “That China’s rise severely disrupted local labor markets in high-income countries came as something of a surprise, to both economists and policymakers,” they write. Even as Chinese imports were inflicting long-lasting damage in manufacturing communities across America, they write, many economists remained “sanguine” about how they were adjusting.

But it’s not like no one saw the destruction coming. In 1999, there were violent protests in Seattle against the World Trade Organization. Labor unions were shouting from the rooftops that foreign competition was devastating for their members. And politicians like Bernie Sanders, Ross Perot — and, yes, Donald Trump, then running to get the presidential nomination of the Reform party — vociferously opposed the bipartisan free-trade movement.

Why did so many economists and policymakers minimize the potential devastation free trade with China would wreak on many Americans?

For one, Autor says, the preceding history of free trade had not been as disruptive. “A lot of trade in the 20th century was trade among rich countries,” Autor says. “So it was more like, we sell some jet engines to France, they sell some champagne to us.” Trade wasn’t really about cut-throat price competition. “We weren’t used to major trade expansions with much lower-income countries,” Autor says. When America and the rest of the world opened its doors to Chinese-made products, many economists (and policymakers) underestimated the effects of something that is painfully obvious in retrospect: all of a sudden rich-world workers had to compete with a vast sea of other workers willing to work for cheap wages.

Autor also suggests that the field was failing to ask the right questions and look carefully at the evidence, and that economists didn’t have the same data-crunching abilities back then. In the years since, economics has seen what some have called an “empirical revolution,” where statistical techniques have seen big improvements, data sources have gotten much bigger and richer, and evidence looms larger than traditional theory.

A bedrock theory in economics has been the theory of comparative advantage, which basically says “free trade among consenting nations raises GDP in all of them,” Autor says. And, we should say, that may still be true. Autor and his colleagues’ research focuses on how manufacturing workers and their communities adjusted to the trade shock. They don’t look at the overall costs and benefits of free trade with China.

Trade with China also had winners. For example, it benefited American farmers, who got access to a massive new market for their goods. It benefited high-skill workers, like lawyers, designers, stock traders, and consultants. It benefited Silicon Valley, Wall Street, and a host of big corporations, which got access to cheap labor to manufacture their products and a massive market to sell goods and services. Big profits in this transpacific relationship helped boost the stock market. And trade with China benefited American consumers, who could now get access to cheaply made products that fill the aisles of stores like Dollar General and Walmart.

That all may be true, Autor says. But, looking at the devastation in many former manufacturing towns, he says, “Every day low prices” — a reference to Walmart’s slogan — “doesn’t compensate for not having a job.”

The theory of comparative advantage also acknowledges there will be losers from trade. But, Autor says, economists began using theoretical models that painted this rosy picture about what would happen to those harmed by it. These models contributed to wishful thinking that labor markets would adjust pretty easily to the trade shocks and that the workers harmed by trade would easily move to new sectors or places as the economy grew and changed.

Autor says they were surprised to find that workers, on average, did not follow these pathways for better jobs. First, their data shows only a low percentage of workers moved out of manufacturing into non-manufacturing jobs. Second, he says, they don't see an increase of these workers moving to new places. In fact, he says, it’s the opposite.

“They became less likely to move out,” Autor says. One potential reason is “because they were in such dire straits.” Or, maybe, in many cases, “they didn’t see better opportunities available to them. Many of the places they might have gone to were similarly affected.” And there are, of course, a whole bunch of non-economic reasons people don’t move, including wanting to remain close to their family and friends.

Instead of moving to new sectors or places, manufacturing workers either dropped out of the labor force or clung to jobs in their dying industries. Even those who were able to keep jobs in declining manufacturing businesses still suffered. They saw their wages stagnate and their opportunities for upward advancement disappear.

As stated earlier, in their new research, the China Shock economists find that employment in these places did eventually rebound. It took like a decade or more. And the jobs were different. But local economies did come back.

However, they find, the new jobs in new industries were taken by different people. Rather than the sort of storybook version of trade adjustment, where workers rather quickly find new jobs, Autor says that they find “a lot of this adjustment process is generational. It really is a different generation of workers doing a different set of jobs in the same places.”

Are Tariffs A Good Idea?

Now, President Trump is leading the charge against free trade. Supporters of President Trump’s tariffs come in at least two different stripes.

One camp seems to believe that, yes, tariffs will have costs for the American economy but they’re worth it for political reasons. Trump has sold his tariffs threats against Canada and Mexico, for example, as helping the United States reduce immigration and the flow of drugs into the country. Trump’s threat of tariffs, they believe, can also help the United States get more out of its trade relationships, like compelling foreigners to buy more of our stuff.

Another camp seems to believe that higher tariffs are an end in themselves. They seem to believe that tariffs can make America's economy stronger and maybe even reverse the damage of trade shocks. Marc Short, who served in the Trump White House during President Trump’s first term, was recently on a panel on NBC’s Meet The Press, and he said he believed this camp was more powerful in the Trump 2.0 administration.

“The first administration had economic advisors and national security advisors who believed in trade, for both economic benefit and national security benefit,” Short said. “The team he has around him today has a very different viewpoint. A very mercantilist viewpoint that says you should be paying for access to American markets, regardless of the reality that Americans are the importers paying that tariff — that tax.”

Widespread use of tariffs, especially with close trading partners, Autor suggests, will ultimately harm the economy — including the manufacturing sector. “So much of the stuff that is manufactured here uses foreign parts,” Autor says. “There is bicycle manufacturing in the United States, but almost all their parts are coming from Taiwan, for example.” American auto manufacturers rely on parts “moving freely across the border between Canada, Mexico, and the United States. And when you raise tariffs, you’re basically creating costs and frictions for all of those transactions. You're gonna raise costs for US manufacturers. And we saw the first round of Trump tariffs didn't do much for US manufacturing. We don't see any evidence that actually caused a rebound. It mostly caused prices to rise.”

But, Autor says, that doesn’t mean there’s no role for tariffs to strengthen the American economy and create good-paying jobs. He suggests that temporary use of tariffs on strategic products — in conjunction with public investments — can nurture growing industries of the future and can help working class Americans thrive in the 21st century.

The China Shock research suggests that classic, free-market economic theory blinded many to the reality that free trade can destroy the livelihoods of many people and that they have a hard time adjusting.

The late and great Nobel prize-winning psychologist Daniel Kahneman called this sort of thinking in economics and other realms “theory-induced blindness.” “Once you have accepted a theory and used it as a tool in your thinking, it is extraordinarily difficult to notice its flaws,” Kahneman wrote.

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Why Economists Got Free Trade With China So Wrong

“The China Shock” Revisited

Some Reasons Why Economists Blundered On Free Trade

Are Tariffs A Good Idea?

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