Trump Is Paving the Way for Another ‘China Shock'
To the extent that Donald Trump's trade war with China is based on a coherent story about the world, it is this: Free trade with China has been a disaster for the American worker, and we need tariffs to reverse the damage.
No one knows more about that story than the MIT economist David Autor. In 2016, he co-wrote a paper with David Dorn and Gordon H. Hanson that challenged the economics profession's rapturous view of free trade. Drawing on their previous research, Autor and his co-authors concluded that from 1999 to 2011, the rise in Chinese imports had cost roughly 2 million American workers their jobs, with the bulk of those losses coming in the years immediately following China's accession to the World Trade Organization in 2001. In the subset of factory towns where the damage was most concentrated, entire communities fell into ruin. The authors called the phenomenon 'the China shock.'
The same year that the paper came out, Trump ascended to the White House—in part by railing against free-trade agreements and promising to bring back jobs from overseas. Later research found that he had overperformed in counties that had been hardest hit by trade with China, helping him win key swing states such as Michigan, Wisconsin, and Pennsylvania. The phrase China shock was suddenly being spoken all over Washington. And in the coming years, a new bipartisan consensus emerged that restricting trade with China was necessary to protect American workers.
Broadly speaking, Autor shares that view. His research findings have convinced him that the old free-trade consensus was wrong. But he also believes that Trump—who has imposed sweeping 145 percent tariffs on nearly all Chinese imports, and who seems to announce or walk back some new trade policy at least once a week—is challenging that consensus in the most counterproductive way possible. In Autor's view, Trump's tariffs will actually weaken American manufacturing, with the potential for damage far greater than what the country experienced the first time around. 'I think the Trump folks are asking the right question,' he told me. 'But they've come up with just about the worst answer.'
This interview has been condensed and edited for clarity.
Rogé Karma: Walk me through the key findings of the China-shock paper. What did you discover, and what are the conclusions you drew from it?
David Autor: The paper came out of the fact that China started exporting a rising number of manufactured goods to the U.S. in the 1990s and early 2000s. Most economic models envision a scenario where labor markets adjust to changes like this pretty smoothly. The effects are broad and diffuse. Most people displaced find employment opportunities in other sectors. There might be an effect on earnings, but it is pretty small.
[Jerusalem Demsas: There's no coming back from Trump's tariff disaster]
What we found instead was a really large effect on employment rates in the labor markets that were most exposed. In aggregate, we estimate that about 1 million to 1 million and a half manufacturing workers were directly displaced. If you consider spillovers to other sectors of the economy, it's about 2 million workers. In these areas, we also saw a decline in earnings, an increase in child poverty, an increased dependence on programs like Medicaid and disability insurance. And these places didn't recover quickly, if at all.
If this had happened over the course of 20, 30 years, it wouldn't have done so much damage. People would have had time to adapt. There would have been a lot of natural attrition and turnover to smooth things out. But most of the China shock happened over just seven years. That's what made it so painful.
Karma: The paper is obviously focused on the harms that trade with China brought. But any economist will tell you that free trade also has immense benefits: It lowers prices; it raises living standards; it boosts economic growth. So how do you weigh the benefits of free trade over this period versus their costs?
Autor: I agree that, on average, trade does tend to make people better off. The problem is, no one exists at the average. You and I had no downside costs of the China shock. We didn't lose any work; we just got lower prices. Whereas for the folks in, say, Hickory, North Carolina—yeah, they got lower prices, but they also got a big negative income shock. And those experiences aren't equal. You and I probably hardly even noticed the benefits we got. But the costs in terms of lost jobs and wages and factories are very concentrated for specific people in specific places.
So I'm not saying trade shouldn't happen at all. But we should not pretend that it's going to be costless or that it will make everyone better off or that we don't have to do anything to help people adjust. That's the big mistake. And I think economists, unfortunately, were complicit in us making that mistake. We were too sanguine about the benefits of free trade without recognizing the downside costs.
Karma: The Trump administration and the intellectuals surrounding it are constantly citing the China shock as the justification for their actions. The basic thinking is: Our trade policies with China destroyed all these manufacturing jobs, and so cutting off that trade with tariffs is the way to fix that. Is that the right approach?
Autor: Absolutely not. I think the Trump folks are asking the right question. But they've come up with just about the worst answer. It's a classic case of fighting the last war. They're looking over their shoulder, wishing we hadn't made the mistakes we made 20 years ago. But what they are doing now is just compounding the errors.
The jobs that we lost to China 20 years ago: We're not getting those back. China doesn't even want those jobs anymore. They are losing them to Vietnam, and they aren't upset about it. They don't want to be making commodity furniture and tube socks. They want to make semiconductors and electric vehicles and airplanes and robots and drones. They want those frontier sectors.
As it happens, those are the sectors we've actually held on to. But we could lose those too. We could lose Boeing. We could lose GM and Ford. We could lose Apple. We could lose the AI sector. These are the parts of manufacturing that generate good jobs but also so much more than that. They are where innovation occurs, where the big profits are, where technology and military leadership come from. And those are the sectors that we stand to lose next.
So the goal shouldn't be to reverse the first China shock. It should be to prevent a China shock 2.0.
Karma: But if we think that shock is coming, isn't that a justification for what Trump is doing, at least with the China tariffs? We're not going to make the same mistake twice.
Autor: I understand why someone would think that. But these tariffs are going to do the opposite. We're not just putting tariffs on tennis sneakers. We're putting tariffs on steel, on rare earths, on machine parts, which means we're raising the cost of the inputs for all the things we make. That makes those frontier sectors way less competitive. If we want to keep these industries flourishing, we need them to be able to export to the rest of the world. And who the hell is going to buy our cars or planes if we've suddenly made them more expensive?
Karma: So what's the answer, then? Clearly, you don't think we should just sit idly by and wait for the next shock to happen. What should be done about it?
Autor: I actually think we can learn something from China's example. Ten years ago, China decided they wanted to be at the frontier of a handful of sectors: drones, semiconductors, EVs, solar cells, etc. And for those sectors, they did a combination of protection alongside a lot of public investment. There was also some intellectual-property theft in there, for sure. But the bottom line is, China is now a leader in many of those sectors. Companies like BYD or Xiaomi or Huawei are some of the best in the world. They don't even need the protection or the subsidies anymore. They are just good.
[Phillips Payson O'Brien: Trump's trade war handed China a strategic advantage]
If we're serious, we need to do something similar. The Inflation Reduction Act was one effort to basically jump-start the clean-energy and EV industries. The CHIPS and Science Act was trying to revitalize semiconductor manufacturing in the United States. We could do a lot more of that. We could turn the salvation of Boeing into a national project.
You also may need to protect these sectors with policies like tariffs. But that's a targeted set of protections, sort of like the tariffs the Biden administration put on things like EVs and solar cells and semiconductors from China last year. And you need to combine that with huge government investments, commitments to public purchasing, investments in universities, bringing skilled talent from overseas, expanding the H-1B program. There's lots and lots of things you can do.
But it's important to remember that China has 120 million manufacturing workers; we have 13 million. We're not going to be able to achieve their kind of scale on our own. So we need to pick and choose our battles, and then we need to work with our allies in that project.
Karma: On basically everything you just listed, Trump has done the opposite. He's threatened to get rid of CHIPS and the IRA. He's cut off a lot of scientific funding. He's going to war with the universities. He's removed the visas for a bunch of foreign-born students. He's antagonizing our allies. It's a bit ironic that in the crusade to bring back the industries we lost, we may be undermining the industries we have or could have.
Autor: Exactly. I mean, just look at the whiplash the auto companies are experiencing. They made all these investments in EVs, and now we're saying we're going to go back to clean coal and internal-combustion engines? This is crazy. These companies have made huge, costly investments. Even though Tesla is tanking, consumer demand for EVs is rising. And we're all of a sudden going to say, 'No, turn your back on that.' That's a death wish. Fifteen years from now, almost no one will be driving an internal-combustion car. They're just not as good.
Karma: When people think about the China shock, they usually think about the China part, but in the paper, you really emphasize the shock piece—the idea that big, sudden shocks to labor markets can have really devastating effects. And if that's true, then could you imagine these tariffs, this trade war with China, actually creating their own kind of shock?
Autor: Absolutely. Just listen to what businesses are saying right now. You can't make investments with this much uncertainty. You aren't going to site a plant in the United States if you don't know what tariffs will be a week or a month or a year from now. Heck, it's hard to even make big hiring decisions in this environment.
The Wall Street Journal recently did a podcast about this company called Honey-Can-Do. They make things like laundry baskets, shelves, etc., meant to sell at Target or Walmart. A couple of years ago, they saw that tensions with China were rising, so they moved a big chunk of their supply chain to Vietnam. And that was expensive. They had to do all this retooling. The infrastructure isn't as good in Vietnam. The transportation isn't as good. The shipping isn't as good. But they absorbed all those costs to insulate themselves. And then all of a sudden there were huge tariffs on Vietnam. And that really puts their business in jeopardy.
And so, take that story and then extend it all across the economy. And what you have is a level of uncertainty we've never seen.
Karma: And that's before you even get to the higher input costs from tariffs. Or the foreign retaliation on our exporters. Or the possibility that consumers pull back on spending.
Autor: Exactly. I really do worry that this combination is going to lead to its own kind of economic shock. Except this time, it will have been entirely self-inflicted.
[Rogé Karma: What if China wins the trade war?]
Karma: One interpretation of everything that has happened in recent weeks is that maybe the free-market economists were right all along. Tariffs are clearly terrible. They are economically destructive. Let's forget all this nonsense and go back to the world of as much free trade as possible. How do you respond to that view?
Autor: I don't think that's the right response. Have we really learned nothing from the past 25 years? Just because the Trump administration has taken us down what is clearly the wrong path doesn't mean the one we were on previously was the right one. They are both dead ends.
I understand the impulse. Letting free trade rip is an easy policy. Putting up giant tariffs is an easy policy. Figuring out some middle path is hard. Deciding what sectors to invest in and protect is hard. Doing the work to build new industries is hard. But this is how great nations lead.
And right now, the United States is giving up on all of those things, even as China is doubling down on them. As a very patriotic person, I find that absolutely heartbreaking. We can do better.
Article originally published at The Atlantic
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