THE CHINA SHOCK
J. D. Vance’s 2016 book Hillbilly Elegy is a lament on behalf of America’s left-behind people, though reading it, one senses the author’s deep ambivalence about how much to blame the victims.46 Part of the economic hollowing out of the parts of Appalachia the book is set in occurred due to trade with China.
The fact that poor people got hurt is what we would expect from the Stolper-Samuelson theorem: in rich countries it is the workers who suffer. What is surprising is how geographically concentrated the suffering ends up being. The left-behind people live in left-behind places.The approach taken by Petia Topalova to examine the impact of trade liberalization on India’s districts was replicated in the United States by David Autor, David Dorn, and Gordon Hanson.47 China’s exports are heavily concentrated in manufacturing, and within manufacturing they are concentrated in specific classes of products. For example, within the apparel sector, sales of some goods in the US, such as women’s nonathletic footwear or waterproof outerwear, are completely dominated by China, but for other goods, such as coated fabrics, almost nothing comes from China.
Between 1991 and 2013, the United States was hit by the “China shock.” China’s share of world manufacturing exports grew from 2.3 percent in 1991 to 18.8 percent in 2013. To examine its labor market impacts, Autor, Dorn, and Hanson constructed an index reflecting the exposure of each US commuting zone to the China shock. (A commuting zone is a cluster of counties constituting a labor market, in the sense that it is possible to commute between them for a job.) The index is built on the idea that if Chinese exports to countries other than the US of a specific commodity are particularly high, implying China is generally successful in that industry, the commuting zones in the US producing that particular commodity will be hurt more than those producing another commodity.
For example, since China’s growth in female nonathletic footwear was particularly rapid after China’s accession to the WTO, a commuting zone producing lots of footwear in 1990 would be more affected by the China shock than a commuting zone producing mostly coated fabrics, where China was not so present. So the China shock index measures the vulnerability of a region’s industrial mix to China’s strength by weighing each product type by China’s import to the EU.US commuting zones fared very differently depending on what they happened to produce. Those zones more affected by the China shock experienced substantially larger reductions in manufacturing employment. More strikingly, there was no reallocation of labor to new kinds of jobs. The total number of jobs lost was often larger than merely the number of jobs lost in the industries that were hit, and rarely less. This is presumably a consequence of the clustering effect we talked about. Those who lost their jobs tightened their belts, further reducing the economic activity in the area. Nonmanufacturing employment did not pick up the slack. If it had, we would have seen an increase in nonmanufacturing employment in the most affected regions. In fact, for lower-skilled workers, the increase in nonmanufacturing employment in affected commuting zones was lower than in other regions. Wages also declined in these areas compared to the rest of the country (and this was a period of stagnant wage growth overall), especially for low-wage workers.
Despite the fact that there were neighboring commuting zones essentially unaffected by the shock (and zones that actually benefitted, say, by importing certain components from China), workers did not move. The working-age population did not decline in the adversely affected commuting zones. They had no work.
This experience is not unique to the United States. Spain, Norway, and Germany all suffered similarly from the impact of the China shock.48 In each case the sticky economy became a sticky trap.