Puting the so-called “China Shock” into proper perspective

From Cafe Hayek. Excerpt:

"Scott Lincicome and Arjun Anand put the so-called “China Shock” into proper perspective."

China’s own market‐​based reforms—policies beyond US officials’ control and ones China critics should cheer—were likely the China Shock’s biggest drivers.

Autor, Dorn, and Hanson’s China Shock papers are frequently characterized as not merely supporting but advocating US government restrictions on Chinese imports due to the China Shock’s damage to the US economy writ large and especially to American manufacturing employment. None of this, however, is accurate.

For starters, their papers strictly focus on job losses incurred by specific local labor markets due to the China Shock and the failure of those markets (workers) to adjust in the following years. On the former issue, the figure of 2.4 million lost jobs during 1999 and 2011 was the authors’ maximum estimate and came amid an economy‐​wide gain of approximately 2.2 million jobs (even as the labor market effects of the Great Recession persisted beyond 2011). The China Shock’s 1 million lost manufacturing jobs, meanwhile, accounted for less than 20 percent of the total manufacturing job losses over the same time frame—and a fraction of the tens of millions of job separations that occur in the United States each year. Thus, even the China Shock papers themselves confirm that dislocations caused by Chinese import competition, while of course important to the workers and communities implicated, were at best a plausible contributor to—not the main driver of—US workforce trends during the 2000s.

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Several studies have found that Chinese import competition was directly responsible for fewer US manufacturing job losses than the totals calculated in the China Shock papers. For example, a model created by Lorenzo Caliendo and others attributed only 15 percent of job losses between 2000 and 2007 to the China Shock. Other researchers found offsetting job gains or smaller losses when considering factors such as value‐​added trade flows or the US housing market, leading to estimates of net job loss as low as 0.22 percent of nonfarm employment. More recently, Clément de Chaisemartin and Ziteng Lei identified a significant methodological flaw in Autor, Dorn, and Hanson’s original 2013 paper and found that a more robust assessment of the same data would prevent one from concluding that Chinese imports caused a substantial decline in US manufacturing employment.

Economists Alan Reynolds and Philip Levy, along with former US diplomat Charles Freeman, go even further, arguing that the China Shock likely caused only a small decline in US manufacturing employment after accounting for other trends—especially non‐​Chinese imports. These and other scholars note that the manufacturing sector’s share of the US workforce declined steadily before and during the shock period (see Figure 1) due to trade, technology, American workers’ increasing skill levels, and the economy’s natural transition to services.

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A crucial question left unanswered by Autor, Dorn, and Hanson’s China Shock papers is whether imports from China boosted jobs in the nation overall. Several other economists have explored this issue in depth, finding mostly positive results. Nicholas Bloom and colleagues, for example, concur with Autor, Dorn, and Hanson that the China Shock caused manufacturing job losses, especially for those without college degrees, but they add that the losses were offset by gains in service jobs in other regions. Several other studies (see this Caliendo and Fernando Parro paper for a review of the literature) have similarly found that a decline in US manufacturing jobs during the China Shock period was accompanied by increases in American service‐​sector jobs. The results from Zhi Wang and colleagues were even more positive: they found that, after accounting for the effects of Chinese imports throughout the supply chain, specific jobs were indeed lost, but overall employment and wages increased, even in regions that experienced large manufacturing employment declines (contra Autor, Dorn, and Hanson)."