Lecture 13.1

Globalization and the China Shock

Emmanuel Teitelbaum

America First & The New Protectionism

“Chief Ripper-Offer”

“We’ve been ripped off by every country in the world, but China I would say is the leading candidate for the ‘chief-ripper-offer.’”

— Donald Trump, Rose Garden, April 2, 2025


Trump’s “Liberation Day” imposed tariffs of up to 145% on Chinese goods and double-digit tariffs on virtually every other trading partner. China retaliated with tariffs of 84%+ on US goods.

The Retreat from Globalization

  • 2018–2019: First Trump trade war imposed $360 billion in Section 301 tariffs on Chinese goods (Trade Act of 1974)
  • 2020: Phase One deal promised no new tariffs if China purchased $200 billion of U.S. goods and services
  • 2021–2024: Biden maintained and expanded Trump-era China tariffs as bipartisan consensus shifted on trade
  • April 2, 2025: “Liberation Day” imposed sweeping tariffs on nearly every trading partner

The Political Question - Why did free trade, long the orthodoxy in both parties, lose its public legitimacy?

The answer may lie in the China Shock.

Globalization: Concepts

Globalization


  • At the broadest level, globalization is the increasing integration of people, cultures and institutions

  • IMF’s four aspects: trade; investment; migration; knowledge

  • In economics, globalization typically refers to increasing trade and investment

Benefits of Globalization


  • Increased capital flows
  • Sharing of knowledge & technology
  • Lower prices for consumers
  • Cultural exchange
  • New economic opportunities
  • Others?

Challenges of Globalization


  • Exploitation and weak regulation
  • High start-up/investment costs
  • Localized job loss and displacement
  • Immigration pressures
  • Erosion of social contracts
  • Others?

Theory of Comparative Advantage


  • Ricardo (1817): a country should specialize in what it can produce at lower opportunity cost, even if it is absolutely better at everything

  • In a world of US–China trade:

    • China has a comparative advantage in labor-intensive manufacturing (abundant, cheap labor)
    • The US has a comparative advantage in high-skill, technology-intensive sectors

  • Standard prediction: trade liberalization raises aggregate welfare

    • US workers displaced from manufacturing should reallocate to sectors where the US is competitive
    • Adjustment is assumed to be relatively smooth and fast

  • The critical assumption: labor and capital move freely across sectors and regions

The China Shock

China’s Rise


  • In 1989, the Wall Street Journal predicted China would be a future growth laggard

  • Deng Xiaoping’s 1992 “Southern Tour” relaunched market reforms:

    • Special Economic Zones (SEZs): 20 in 1991 → 150 by 2010
    • FDI inflows surged from 0.7% of GDP (1980s) to 4.2% (1990s–2000s)

  • China’s share of world manufacturing exports: 2.3% (1991) → 18.8% (2013)

  • WTO accession in 2001 accelerated the surge

  • US imports from China rose by $304 billion between 1991 and 2007

US Imports from China

The Pre-2000 Consensus — and Its Challenge

Before China’s rise, economists largely agreed:

  1. Trade had not been a major cause of US manufacturing employment decline — technology was the main culprit
  2. Workers displaced by trade could readily relocate to other regions or sectors
  3. Any labor-market effects would be nationally diffuse, not locally concentrated

Autor, Dorn & Hanson (2013/2016) challenge all three:

  • Chinese import competition did substantially reduce US manufacturing employment
  • The shock was geographically concentrated — concentrated in specific communities
  • Local adjustment was slow and painful, not smooth

Methodology: Local Labor Markets


  • ADH study commuting zones (CZs) — clusters of counties forming local labor markets (722 CZs in the contiguous US)

  • Key insight: US regions vary in their pre-existing industrial mix → some were far more exposed to Chinese imports than others

  • The identification strategy: to isolate the China supply shock from US demand shifts:

    • Instrument US import growth from China using China’s export growth to other high-income countries (Australia, Germany, Japan, etc.)
    • If the same Chinese industries were flooding markets in both the US and Germany, it must be a supply shock from China — not a reflection of US demand

  • This allows a causal claim: Chinese import competition → local employment decline

Key Finding 1: Industry Employment


  • Industries more exposed to Chinese import competition saw substantially larger declines in US manufacturing employment

  • A 1 percentage-point rise in import penetration → 1.3 log-point reduction in industry employment (Acemoglu et al. 2016)

  • The effect accelerated after China’s WTO accession (1999–2007):

    • Manufacturing industries contracted by 3.6 log points/year in this period
    • vs. only 0.3 log points/year during 1991–1999

Key Finding 2: Regional Losses Don’t Wash Out

  • Standard trade theory predicts displaced workers move, spreading the shock nationally

  • ADH find the opposite. In commuting zones more exposed to Chinese imports:

Outcome Effect of $1,000 more per-worker import exposure
Manufacturing employment share −0.60 pp
Non-manufacturing employment share −0.18 pp (not sig.)
Unemployment rate +0.22 pp
Out of labor force +0.55 pp
  • Job losses were not offset by gains elsewhere in local economies
  • Labor mobility was low — especially among less-educated workers

Key Finding 3: Adjustment Is Slow


  • Standard models assume quick adjustment to trade shocks

  • ADH find the adjustment is remarkably slow:

    • Wages and labor-force participation remain depressed for at least a full decade after the shock begins
    • Exposed workers experience greater job churning and significantly lower lifetime income
    • Government transfer payments (disability, UI) rise substantially in exposed regions

  • Bottom line: the costs of the China Shock were large, geographically concentrated, and long-lasting — far beyond what standard comparative-advantage models predicted

Discussion: The Evidence

  • What is Autor et al.’s main challenge to standard trade theory?

  • Why does the methodology matter, e.g. why can’t they just compare regions with more vs. fewer manufacturing jobs?

  • Does the evidence suggest free trade was a mistake, or that adjustment support failed? Is there a difference?

  • What does the “no geographic mobility” finding tell us about assumptions built into comparative advantage theory?

Political Implications

Did the China Shock Cause the Backlash?

  • Autor, Dorn, Hanson & Majlesi (2020): congressional districts more exposed to Chinese imports experienced:
    • Greater political polarization
    • Shift toward more conservative Republican representatives
    • Erosion of moderate Democrats in manufacturing-exposed districts
  • Colantone & Stanig (2018): similar patterns in Europe — regions more exposed to Chinese imports moved toward nationalist/populist parties

This narrative is compelling: trade liberalization hurt specific communities → those communities turned to populist politicians → Trump, Brexit, and the broader wave of economic nationalism

The Pushback: Mechanism Is Unclear

  • The aggregate-to-individual link is contested:
    • Research finds weak individual-level evidence that trade-exposed workers vote differently than similar workers in less-exposed areas
    • Economic grievance may affect preferences modestly and temporarily (Margalit 2011)
    • The aggregation problem: regional patterns may reflect community-level social change, not individual pocketbook voting
  • Alternative explanations (Inglehart & Norris): “cultural backlash”
    • Identity and values, not just wallets, drive populist voting
    • Affected communities also had high opioid mortality, family dissolution, declining social trust
  • Key question: Does the China Shock cause political change directly through economic grievance, or indirectly through community decline?

Remaining Questions


  • Is the China Shock → political backlash link causal, or were affected regions already culturally/demographically primed for populism?

  • Does economic grievance directly drive votes, or does it work through:

    • Social network erosion and community decline?
    • Elite cue-taking and media framing (Fox News, etc.)?
    • Identity concerns activated by visible economic loss?

  • ADH establish an important economic fact — localized, persistent harm from trade — but the political transmission mechanism remains an active area of research

The Bigger Debate

Two Camps

Free trade’s defenders

  • Aggregate gains from trade are real and large
  • China’s rise lifted 800 million people out of poverty
  • US consumers benefited from cheaper goods
  • The answer is better adjustment assistance, not protectionism
  • Tariffs invite retaliation and raise prices

China Shock critics

  • Aggregate gains masked severe local costs
  • Adjustment assistance was underfunded and ineffective
  • Communities — not just workers — were damaged
  • Trade policy is inseparable from distributional politics
  • The backlash was predictable, and economists ignored the warning signs

Discussion

  • Do you find the “China ripped us off” narrative convincing after reading ADH? What does the evidence actually say?

  • If adjustment costs are large and slow, what is the appropriate policy response?

    • Better social insurance? Industrial policy? Trade restrictions?

  • Does the empirical evidence justify Trump’s tariffs? Or is that the wrong question to ask of social science?

  • If pocketbook voting doesn’t fully explain the Trump coalition, what does?