How the 'China Shock' devastated small American communities : Planet Money : The Indicator from Planet Money Trade with China made American goods cheaper and lifted millions of Chinese people out of poverty. At the same time, it devastated communities across America's heartland. What have we learned from the "China Shock"? And what can we do to prevent something like it from happening again?

'The China Shock' and the downsides of globalization

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SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

STACEY VANEK SMITH, HOST:

This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith.

GREG ROSALSKY, HOST:

And I'm Greg Rosalsky. For decades, economists saw globalization as almost like this universal good. If a company that made socks in Virginia could more cheaply make socks in China, then it should probably move there. For America, this would mean cheaper socks, and for China, it would mean workers would be given a ladder out of poverty; win-win.

VANEK SMITH: Now, of course, the sock-maker in Virginia would lose her job. But the traditional thinking was that the whole economy would grow richer and grow larger, and so there would be more opportunities for the sock-maker. She could move to a different town or get some new job skills and find different employment.

ROSALSKY: About a decade ago, three economists began taking a closer look at some of the collateral damage from globalization. And they found that this story was a bit more messy than that. The research came to be known as the China Shock.

GORDON HANSON: What we found was that the major loss in manufacturing jobs that occurred in the first decade of the 2000s, about a quarter of that we could attribute to increasing for competition from China. And that ends up being kind of right about a million jobs.

VANEK SMITH: This is Gordon Hanson. He's an economist at Harvard's Kennedy School, and he's one of three economists behind the China Shock research. He says those jobs, those lost jobs, were heavily concentrated in small and medium-sized communities in America's heartland.

ROSALSKY: And this created what looked like miniature Great Depressions in these places.

HANSON: It's not just that those jobs were lost. Those workers didn't transition into something else. They didn't really take up jobs outside of manufacturing, nor did they move.

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VANEK SMITH: When this China Shock research came out, it kind of changed the economic conversation. And it helped to explain some cultural phenomena - for instance, why so many working-class Americans were really attracted to President Donald Trump's populist, you know, make America great again, tax imports from China message.

ROSALSKY: This team of researchers just released a follow-up study to see what happened to American manufacturing towns in the years since the China Shock. And it's come out just ahead of President Biden's historic basically Zoom call with China's President, Xi Jinping.

VANEK SMITH: Today on the show, we revisit the China Shock.

ROSALSKY: Gordon Hanson, the Harvard economist, has been studying the China Shock with his colleagues, David Autor and David Dorn. And their findings have been pretty eye-opening.

VANEK SMITH: Between 1991 and 2013, Chinese manufacturing exports went from only 2.3% of the world's total to almost 20% of the world's total. I mean, that is huge. It's almost a fifth. And Gordon says it all started with Chinese reformist leader Deng Xiaoping in the 1980s.

HANSON: He'd initiated this process of reform and opening in China. And in the early '90s, he then extended that to include China embracing exporting to the rest of the world as a strategy for growth. That then takes off in the 1990s. As China's negotiating its entry to the World Trade Organization, it undertakes a whole bunch of additional reforms, and that just really kick-starts a massive export boom that has its kind of most full expression right after 2001, when China did join the WTO.

VANEK SMITH: Most leaders in Washington really supported the idea of free trade with China, but there were some voices on the left and right who argued that it would really be devastating for American workers. Labor unions lobbied against opening up trade with China. There were these big protests in cities all over the country - very famously, Seattle - and people were worried, among other things, about workers losing their jobs, and also that U.S. businesses would have trouble competing with China.

ROSALSKY: But economists at the time weren't that worried about those downsides. Gordon says they thought the problems would basically sort out themselves.

HANSON: They had this notion that the U.S. economy is this incredibly dynamic place. We create millions of jobs every year and we destroy millions of jobs every year. We can handle moving a couple million manufacturing workers from one sector to another. (Inaudible) didn't appreciate is when that job loss happens in particular places, it's really concentrated in the smaller and medium-sized towns among the non-college educated who are not that likely to move as a consequence of losing their jobs. It ended up creating these pockets of distress. That was the surprising part. That's what we didn't know what was going to happen.

VANEK SMITH: Before the China Shock research, economists didn't really think of trade or free trade as an important part of the story about rising inequality in the U.S. And to be fair, Gordon says, before China came on the scene, it really wasn't.

HANSON: We've never seen a country that was this big, this specialized in manufacturing open itself up that quickly. And so just a profound shock for the global economy.

VANEK SMITH: And of course, China's rise was decades in the making. Along with freer trade, the global economy saw the rise of container ships, which allowed manufacturers to ship huge quantities of stuff very cheaply and very quickly. Corporations also began pioneering the global supply chain, sourcing parts from multiple locations and getting them assembled in the cheapest, most efficient places possible.

ROSALSKY: Of course, Stacey, we're seeing the system sort of fraying at the edges right now. And as has become my custom lately, I very professionally complain to Gordon about how this is affecting my personal life.

I ordered a gravel bike six months ago and I still haven't gotten it, so...

HANSON: Yeah, I'm waiting on a dog bed. It's three months and counting.

ROSALSKY: (Laughter) Oh, exciting - a dog bed.

HANSON: Yeah, dog's not happy.

VANEK SMITH: Your bike, Greg - this is like the saga of your bike.

ROSALSKY: (Laughter) When my bike comes officially, I consider, like, all problems in the global economy to be over. That's...

VANEK SMITH: Yes, I think that's a great indicator. But of course, things are changing and not just because of COVID. Gordon says China's explosive export growth has been tapering off for a long time now. In fact, he thinks the China shock was basically over a decade ago in, like, 2010.

ROSALSKY: But the effects of the China Shock are still all around us. Manufacturing towns in the United States - or maybe we should say former manufacturing towns - they continue to struggle. Gordon compares the effect of the China Shock on these towns to what happened to coal mining towns when coal mines started to close.

HANSON: Those coal mining towns had experiences that were remarkably similar in that job loss in one sector translated into lower overall employment rates and social breakdown - families being less likely to form, more kids living with single moms in poverty and then more drug and alcohol abuse and substance abuse-related mortality.

VANEK SMITH: Now, of course, globalization had enormous benefits. Clothes and other goods got a lot cheaper for everyone. People's quality of life all over the world rose. Hundreds of millions of Chinese people were lifted out of extreme poverty.

ROSALSKY: But as the China Shock research shows, it also devastated millions of Americans' lives. It ravaged whole communities. It's kind of easy to paint China as sort of the antagonist in this story of, you know, the decline of American manufacturing towns, and Gordon says the country did do some bad things along the way. But he also says that the real antagonist in this story was a failure in policymaking. He says it didn't all have to be this way.

HANSON: My take on the policy failures is that it wasn't about trade policy at all. We were trying to encourage China to join the global trading community, and that's a good thing. The failure was we didn't have the right social policies or labor policies in place to help people adjust when they did lose their jobs.

VANEK SMITH: Policies like better job training programs, more generous unemployment benefits and more investments in communities that saw their main industries disappear.

ROSALSKY: Gordon and his colleagues are hopeful that lawmakers can learn from the China Shock. He says there are other shocks coming. And we need to make sure that workers and communities get the help that they need.

HANSON: The next big shock will be about workers in oil and gas and electrical utilities and industries like cement and steel which use energy intensively. There will be an energy employment shock. That will be the next big thing. Those workers also are concentrated in particular places, and it could be the coal decline all over again but just a bigger deal this time.

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VANEK SMITH: This episode of THE INDICATOR was produced by Brittany Cronin with help from Isaac Rodrigues. It was fact-checked by Taylor Washington. Viet Le is our senior producer, and Kate Concannon edits the show. THE INDICATOR is a production of NPR.

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