As relations between the United States and China continue to deteriorate, the role of trade has come under increasing scrutiny. Trade between the two countries was once the backbone of the relationship. The trade was supposed to benefit both countries economically and help reduce tensions over political and strategic issues.
Over the past decade, that has changed dramatically – not only is economic interdependence now seen in many quarters as a liability, but much of the political community in Washington now believes that the benefits of trade with China are largely offset by the negative effects. A central concern is the negative impact on manufacturing jobs and employment in the United States more generally. This sentiment is especially prevalent in parts of the country that had strong manufacturing sectors before 2000, such as the Midwest and the South.
Although the debate seems settled in Washington, it is far from over among economists, who have analyzed this issue using a range of different methodologies and data sets. Whether intentionally or not, Washington has turned to one side of the debate, and it’s important for the political and business communities to be aware of the broader ongoing conversation that academics are still having. We recently saw again the literature on the “China Shock” and its effect on employment in the United States, with a focus on three teams of economists who approach the question using different methods and data sets.
So what does a broader review of data from multiple studies show? Researchers generally find that prior to 2010, imports from China negatively affected manufacturing jobs in the United States. However, the conclusions are mixed on the net effect on the economy, the final balance of jobs lost in the manufacturing sector and the growth of jobs in the service sector. There is also no evidence that trade with China has a significant negative effect on jobs after 2010 – the loss of manufacturing jobs documented in the early 2000s due to trade with China is not continue today.
There is another result that all academics seem to agree on: the better-educated and more economically diverse regions of the United States were much less affected by the surge in imports from China. This finding is consistent with data on the impact of globalization in other countries, where better education and retraining opportunities have improved the likelihood that workers will benefit from international trade.
A Brief History of the “Chinese Shock”
China’s rise as a manufacturing giant dates back to 1978 and the announcement of “reform and opening up”, when the country’s leaders took the first steps to allow foreign investment and move away from the planned economy. . The effects were first felt in the 1990s, when liberalization policies accelerated and an increasing number of foreign companies began to relocate production to China.
David Autor (MIT), David Dorn (University of Zurich) and Gordon Hanson (Harvard Kennedy School) say the ‘shock’ to the global economy began in 1992, when foreign trade became an important part of the economy China, ending around 2010 when China’s share of US imports stabilized.
China’s export growth was due to domestic reforms that increased productivity and policies to open the country up to global trade. Maoist-era economic policies effectively suppressed China’s economic performance, while Deng Xiaoping’s reforms quickly unleashed China’s economic potential. Joining the World Trade Organization (WTO) in 2001 boosted China’s already improving productivity. Moreover, the certainty of reduced tariff and non-tariff barriers has also made China an attractive destination for foreign direct investment.
Several important circumstances coincided with China’s accession to the WTO in the early 2000s. On the one hand, the share of manufacturing employment had already declined in the United States while other sectors of the economy, such as services, were growing in importance. Even so, the three academic teams whose work we reviewed conclude that the China shock had a negative effect on U.S. manufacturing jobs in at least some regions between 2000 and 2007. In other words, manufacturing jobs were already declining, but parts of US trade with China have accelerated this process.
Has the Chinese shock cost US jobs?
Despite some of the rhetoric in Washington, there is far less agreement among economists on the full impact of the Chinese shock on American jobs. Autor and his co-authors consistently found that areas most exposed to trade with China experienced a net loss of jobs that was not offset by the movement of workers to more dynamic locations or job growth. in sectors other than manufacturing.
Nicholas Bloom (Stanford University) and his co-authors take a different approach by trying to account for the effects of trade with China on the service sector in addition to manufacturing. They find that the loss of jobs in areas with low human capital has been offset by an increase in service jobs in areas with high human capital, such as the west coast and the northeast. Therefore, they argue that trade with China caused no net loss of American jobs. This does not mean that there have not been significant losses within the regions. Like Autor and his co-authors, Bloom and his colleagues did not find that workers migrate in response to changing employment opportunities. Thus, Chinese imports may have resulted in the displacement of jobs and income from the heartland of the United States to the coasts.
A third research effort by Zhi Wang (George Mason University) and colleagues finds an increase in service jobs even in regions that have seen the largest drop in manufacturing jobs due to import competition with China. According to their data, which they say reflects changes in employment along the supply chain, trade has led to an increase in other employment opportunities in the service sector, even in the most difficult fields. hardest hit by import competition.
And all three groups find that education significantly reduced the negative effects of the China shock: regions with higher proportions of college graduates were less negatively affected.
Respond to trade shocks
Overall, everyone agrees that some US regions lost manufacturing jobs as a result of trade with China in the early 2000s, but that trend has come to an end. And everyone agrees that the more educated regions fared better. There is less consensus on how the Chinese shock affected employment as a whole, but it seems likely that it led to an increase in employment in the services sector, and may even have increasing total employment in the United States, but more of that employment moving to the coasts.
These findings are key to keep in mind as policymakers examine the United States’ relationship with China and businesses reconsider their own relationship with the world’s second-largest economy. There may be good reasons for the US and China to decouple or for companies to rethink their supply chain, but the negative economic effect of trade on the US is not necessarily one of them. .
It is important to note that the United States is not the only country to have experienced an increase in Chinese imports in the early 2000s, and some others seem to have handled it differently. In Denmark, a country with very liberal dismissal regulations (like the United States) but strong unions, import competition with China appears to have led to lower wages but not a sharp decline in employment. Employee working hours have decreased, but they have been kept on the payroll by companies. A study suggests this may have led to an increase in the number of workers seeking additional training, which subsequently led to higher wages. And germany The industrial structure seems to have largely spared the country import competition with China in the 2000s.
The economists featured in this article do not always agree on how to measure the effect of imports on employment, but there is little debate about the best solutions to job displacement. None of the academics analyzed in this article has ever publicly argued that tariffs imposed after the fact can help cope with the effects of an earlier trade shock. It’s not even clear that they would effectively protect workers if they were in place to begin with. And certainly, the tariffs do little to solve the woes of American workers who have lost their jobs. What’s more, economists agree that the tariffs raise the prices of consumer goods, which hurts mostly low-income Americans.
Most researchers agree that higher education and worker retraining programs, along with government transfers, would be the most effective way to address the problem. For example, Autor, Dorn, and Hanson discuss the unrealized potential of the Trade Adjustment Assistance Program, which was underfunded to ever have a meaningful impact. This summer, Congress failed to reapprove the program, which had become increasingly small in recent years. A better funded and comprehensive initiative to help displaced workers, whether or not they have lost their jobs due to business or technological changes, could be an important approach to consider.
But the question of how to manage trade policy and import competition must begin with an acknowledgment of the facts. The Chinese shock cost parts of the United States manufacturing jobs in the first decade of the 2000s, but not since. Additionally, trade with China may have benefited Americans in certain ways, including lower prices. The political community must take this complex issue fully into account when determining the most effective way forward.
This article was adapted from “The Chinese Shock: Reassessing the Debate”, originally released by CSIS.