The summary below comes from this paper: https://chinashock.info/wp-content/uploads/2018/02/Lessons-from-Chinas-Rise-IZA.pdf # What is the China shock? [[China]]'s fast growth caused a positive supply shock for manufactured goods, and a positive demand shock for raw materials: > China’s share of world manufacturing exports rose only modestly between 1984 and 1990, from 1.2% to 1.9%. In the 1990s, however, its trade expansion began in earnest. > ... > Between 1991 and 2012, China’s share of world manufacturing value added increased six-fold, from 4.1% to 24.0% (Figure 1). China’s stellar growth generated a large positive net global supply shock for manufactured goods, coupled with a large positive net global demand shock for raw materials. Regional and national economies differ greatly in their exposure to these two forces, and the effects of China’s rise are thus likely to vary across locations according to their own patterns of industry specialization. ![[Pasted image 20211121201134.png]] # How can the effects be identified? The shocks affected different industries to different degrees. These differences can be used to identify the effects. > the distinct nature of China’s comparative advantage gives rise to substantial sectoral variation (i.e. cross- industry and over time) that can be used for credible identification. > > Industrialized countries’ product markets were the first to feel the effects of supply shocks in China. As China’s productive capabilities improved and its trade costs fell, the intensity of competition for US goods increased, inducing a contraction of US industries subject to greater import exposure. Using data on US manufacturing plants for 1977–1997, one study examines the impacts of increased exposure to import competition from low- wage countries [4]. The authors find that over five-year intervals, industries facing larger increases in exposure to trade experience higher rates of plant exit. Among the plants that survive, those in more trade-exposed sectors undergo greater falls in employment and are more likely to switch to a different sector. If, for example, China's exports mostly focused on furniture, then any changes in the US furniture industry that were unique to that industry could be attributed to the China shock. Conclusion: > These findings make clear that employment in import-competing US industries has shrunk as a result of China’s rapid growth. # Regional employment impacts Do these impacts diffuse through the economy (law of one price) or do they impact specific regions more than others? There was more impact in commuting zones (CZs) that had higher exposure to import competition: > Over the period 1990 to 2007, CZs that were more exposed to import competition from China experienced substantially greater reductions in manufacturing employment. Contrary to the established understanding of US labor markets as fluid and flexible, over the course of a decade, trade-induced manufacturing declines in CZs were not offset by sectoral reallocation or labor mobility. Instead, overall CZ employment-to-population rates fell at least equally with manufacturing employment rates, and generally by slightly more. # How big was the effect on employment? > Do the above results indicate that trade-impacted locations suffered employment declines in absolute terms, or simply that they benefited less than trade-insulated locations? This distinction between relative and absolute effects matters: the former covers the distributional effects of trade, whereas the latter deals with the magnitude of the net gains from trade. - Absolute effect: If employment dropped from 100 to 50, the absolute effect would be -50. - Relative effect: If employment grew from 100 to 150, but would have grown to 200 if not for the import shock, then the relative effect is -50. Employment in manufacturing declined in absolute terms, and 10% of that effect can be attributed to Chinese import competition. > The study estimates that if import penetration from China had stopped increasing after 1999, there would have been 560,000 more manufacturing jobs in the US through the year 2011. Actual US manufacturing employment declined by 5.8 million workers from 1999 to 2011, meaning the counterfactual job loss from direct Chinese import competition accounts for 10% of the realized job decline. The relative effect was an employment reduction of 2.4 million. > Summing over both aggregate demand and reallocation effects, and considering both those industries that are directly exposed to import competition and those that are indirectly exposed via input–output linkages, the analysis in [5] finds that import growth from China between 1999 and 2011 led to an employment reduction of 2.4 million workers. There is little evidence to suggest, however, that employment gains in non- exposed local industries substantially offset these losses. Indeed, the estimated employment decline is actually larger than the 2.0 million job loss estimate when considering only direct and input–output effects. # How were wages and transfer payments impacted? Workers in exposed regions also saw reductions in page: > Workers in trade-exposed CZs experience larger reductions in average weekly wages [3], and these impacts are concentrated among workers in the bottom four wage deciles [7]. And an increased government assistance like unemployment insurance: > Perhaps unsurprisingly, CZs that are more trade exposed experience greater increases in per capita payouts of unemployment insurance and trade adjustment assistance (TAA) (see the illustration on page 1, based on [1]), both of which are designed to assist laid-off workers. Changes in employment and wages were persistent, which is not what we'd expect of the labor market was dynamic and workers were mobile. > This is not just a short-term issue: trade-induced declines in local employment and wages appear to be persistent. As the illustration on page 1 shows, CZs that are more trade- exposed see larger per capita growth in publicly provided medical care and government income assistance, indicating that more households are qualifying for income-based health benefits and meeting the threshold for welfare payouts. ![[Pasted image 20211121205100.png]] # Worker-level impacts Being in an exposed industry can lower earnings and it can be hard to escape the negative impact: > Comparing workers with similar demographic characteristics and previous labor market outcomes, but who differ according to the subsequent trade exposure of their 1991 industry of employment, those initially employed in subsequently trade-exposed industries accumulate substantially lower earnings over the period 1992–2007. Although workers who become trade-exposed due to initial industry affiliation move among jobs at a higher rate than those who are not trade-exposed, this trade-induced job mobility is shown to be insufficient to offset the difference in career earnings between more and less trade-exposed workers. Top earners respond by moving to different industries and minimizing the impact. Low earners move either to industries that are impacted or that will be impacted. > Workers whose pre-shock wages are in the top earnings tercile of their age cohort respond primarily by relocating to firms outside the manufacturing sector, and they do not lose earnings relative to their peers who started out in less trade-exposed industries. By contrast, workers in the bottom tercile of pre-shock earnings react by relocating primarily within the manufacturing sector, often remaining in industries that are hit by subsequent increases in import competition. # Positive impacts There are of course positive impacts to trade: > Recent work estimates that China’s entry into the World Trade Organization in 2001 reduced the price index for manufactured goods in the US by 7.6% between 2000 and 2006 [10]. > ... > And there is little doubt that China’s rise as an exporter has been central to its extraordinary economic growth, which lifted 680 million Chinese citizens out of poverty between 1981 and 2010 [11]. The expansion of the economic pie from these positives means that, in theory, all countries could compensate those adversely impacted by trade integration to make all individuals better off. The correct interpretation is not that trade is bad, but if affects subsets of workers differently: > The correct interpretation of the evidence provided here, therefore, is that rising international competition imposes concentrated costs on a subset of workers and communities—not that this competition is harmful in net for a trading country. # Policy Recommendations 1. Trade adjustment assistance programs: > In the US, for example, the federal TAA program is difficult for workers to access and places artificial strictures on their re-employment options. Making assistance more accessible, flexible, and supportive rather than constraining of labor market re-entry would be a first constructive step. 2. Wage insurance that supplements income while transitioning jobs to prevent being out of the job market for too long. > Workers displaced from career jobs typically have trouble getting back into the labor market and are often understandably reluctant to accept a new job at diminished pay and status. But waiting is costly. The longer workers spend unemployed, the harder re-employment becomes. The simple idea of wage insurance is to ease the economic and psychological pain of transitioning to a new line of work. If a displaced worker must take a pay cut to find a job, a publicly provided wage insurance policy would meet them part way. 3. Expand the earned income tax credit: > But the EITC provides almost no cash assistance or employment incentive to childless workers and non-custodial parents, many of whom are low-wage men. Thus, the EITC excludes a group that is much in need. Expanding the EITC into a generalized “earners’ credit” would assist workers whose earnings have been reduced due to economic forces—such as trade exposure and technological displacement—outside of their individual control. 4. Gradual trade policy > There is a natural ebb and flow to labor markets: as older workers retire and younger workers enter, industries are able to change size without disrupting careers. But sharp labor market shocks that convulse entire industries rush this gradual process, imposing steep transitional costs. In short, such shock therapy is rarely wise as labor market policy. 5. Rigorous experimentation > a fifth policy that policymakers should almost universally embrace is rigorous experimentation to learn what works. Policies should not only be well intentioned but also explicitly engineered to be rigorously evaluated as they go into effect. Experimentation may take the form of random assignment, a phased rollout of program benefits among individuals or communities, or a set of crisp administrative rules that creates clear contrasts in the extent or nature of treatment among different beneficiaries. # Resources - https://www.wsj.com/articles/how-the-china-shock-deep-and-swift-spurred-the-rise-of-trump-1470929543 - https://chinashock.info