An Update to the China Shock Examines the Fallout After an Import surge

By Matthew McMullan
Nov 05 2021 |
Beep beep, here comes more trade from China. | Getty Images

But it’s conclusions are incomplete.

The economists behind the China Shock – an oft-cited 2013 report that examined the effect the Chinese import surge had on the American economy and labor force – has returned this fall with an update.

It’s called China Shock 2: Back in the Habit.

No, no, I kid, it’s called China Shock 2: The Quickening.

Man, that’s what they shoulda called it. Anyway, it’s for real called On the Persistence of the China Shock and, like its predecessor, it’s an important report. The 2013 report can be rightfully credited with helping to mainstream the reality that for certain parts of our economy and labor force intense import competition from Chinese manufacturers was devastating. They aren’t the only economists to reach this conclusion, but it’s notable nonetheless: Trade with China was the cause of millions of lost American manufacturing jobs.

For their follow-up (China Shock 2: Electric Boogaloo), they look at what’s happened in the years since their first report. They asked some interesting questions and get some interesting answers.

For example, they write: “Reductions in population headcounts, which indicate net out-migration, register only for foreign-born workers and the native-born 25-39 years old, implying that exit from work is a primary means of adjustment to trade-induced contractions in labor demand.”

That’s a way of saying: Even after the economy collapsed in many American factory towns after the industries were set upon by heavy Chinese import competition, the majority of people didn’t leave town. Economic prospects have left, but people have stayed.

That’s pretty interesting! Also really depressing.

That said: While their analysis and others like it that look at the outcomes of de-industrialization are informative and drive discussion, the conclusion they reach is the wrong one because they misdiagnose the problem. They write:

“The China shock of the 1990s and 2000s was about China’s one-time transition to a market economy. … The next China shock may be more likely to be triggered by industrial policy, e.g., if China makes good on its promise to support advanced technology industries.”

Saying the first China shock was about a “one-time transition to a market economy” is outrageous. By simple omission, this suggests that the political effort to increase trade with China in the late 90s and then achieving it in the early 2000s wasn’t a policy choice unto itself – that corporations and their political allies in Washington didn’t see a huge potential consumer market and an enormous pool of cheap, exploitable labor to be gained via normalized trade relations with the Chinese state. In the first sentence of the decades-old article describing the House vote to normalize trade with China, the New York Times called it “a stunning victory for the Clinton administration and corporate America.” Emphasis added. Because it’s what corporate America wanted, and what it fought for.

What’s more, the idea that China achieved its economic success and triggered a trade surge was because it liberalized its economy is a little much. The next China shock may be more likely to be triggered by industrial policy? Buddy, the last China shock was triggered by industrial policy. Currency manipulation, heavy subsidization, the suppression of labor organizations, a comparative lack of environmental regulation: China did all of this. It still does a lot of this! And when a government does these things in order to promote export-led economic growth, you can fairly call it an industrial policy.

They authors also write:

Although increased demand for renewable energy will surely create new jobs in harnessing solar, wind, and hydro power, these jobs may be located far from existing carbon-based production facilities. New energy intensive industries, such as data centers, may choose to locate near renewable energy providers, possibly further disadvantaging those working in the carbon-based economy. We are now armed with knowledge both of the consequences of localized job loss and the likely location of future worker displacement. This should enable policymakers to prepare for assisting workers, as carbon-based jobs disappear, and regions, as they reorient toward less carbon-intensive activities. Without such preparation, the energy transition may add to the painful history of regionalized job loss.

They’re right: We should learn from our mistakes and have adequate policy responses for the future American workers who will face displacement. The authors even make a point to say how insufficient the U.S. government is at this, writing “the United States does little to protect workers from mass-layoff events such as the China trade shock.” And yes, there should be much more help made available through programs like Trade Adjustment Assistance.

That said, these renewable energy jobs help up here as an example will not, as a colleague of mine put it, descend like manna from heaven. They will have to be created, and if we want the advent of the clean energy economy to be equitable it will take coordination. Direction. Policy? An industrial policy.

Because we already know what will happen if we don’t formulate one and act on it: We’ll lose out on the ground floor of the formation of an industry. We already have a crystal-clear example in recent history in solar panels. For all intents and purposes there is no solar panel industry in the United States because it was lost to a coordinated Chinese state that was determined to get it.

Now it has it, firmly, and it reportedly has integrated forced labor into the solar supply chain. In 2021, chances are that if you’ve got a solar panel up on your roof it was made in China, and the chances aren’t small that some of it was manufactured by somebody who didn’t have a say in their own participation.

But I digress. China didn’t stop targeting industries after if captured solar. The Chinese government has poured fortunes into the development of a domestic electric vehicle industry, for example, and it’s now subsequently far ahead of our own. Here, it’s a fight to get our own states to incentivize buying American when it incentivizes buying electric. That’s indicative of the larger problem we face: Without a coordinated set of policies at the national level – without targeted investment, increased trade enforcement, foreign investment reviews, and a vibrant public procurement market that prioritizes domestic manufacturers, among others – the manufacture of emerging industries will likely be done overseas, because other economies are planning to capture them.

Localized near displaced former factory workers or not, the jobs of the future won’t be created in America at all if we simply react to the trade shocks as they roll in. The authors of the China Shock paper state more than once that the shock plateaued after 2010 and has held in place. That has been awful for the communities it hit. We gotta get them off the plateau, and that will take an industrial policy of our own.

Read the full report here.