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IFS Annual Lecture 2017Professor David Autor:Economic and Political Consequences of China’s Rise for the United States: Lessons from the China Shock

22 June 2017

The Royal Society, London

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Economic and Political Consequences of China’s Rise for the United States: Lessons from the China Shock

David AutorFord Professor and Associate Head, MIT EconomicsIFS Annual Lecture, June 2017

China’s Historic Rise as a World Manufacturing Power

DAVID AUTOR | LESSONS FROM THE CHINA SHOCK 1

Autor, Dorn, Hanson 2016

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China’s Historic Rise as a World Manufacturing Power

Deng Xiaoping, 1904–1997

• Chairman of the Central Advisory Commission of the Communist Party of China

• Chairman of the Central Military Commission

• Chairman of the National Committee of the Chinese People's Political Consultative Conference


China’s Special Economic Zones (SEZs)


The Case for Free Trade

Ricardo’s Big Idea

• Trade allows countries to specialize in the goods in which they are most productive – comparative advantage

• Free trade among consenting nations raises GDP in all of them

David Ricardo, 1772 – 1823


But Here’s the Rub

Winners and Losers

• What is true for the welfare of a country in aggregate does not necessarily apply for all citizens in a country

• Trade normally creates winners and losers

• Diffuse benefits, concentrated costs

Drew Barrymore as Hamlet in 1922


“There’s the Rub”

1. Trade necessitates reallocation of workers and jobs– Workers displaced from career jobs

– May require new location, new occupation

– Often leaves economic – and psychological – scars

Why Is Free Trade Not a Free Lunch?


1. Trade mandates reallocation of workers/jobs

2. Trade permanently alters skills demands– Typically raises demand for high-skill workers in industrialized countries

– Reduces demand for low-skill workers

– Even as trade grows pie modestly, can shrink some slices substantially




2. Trade permanently alters skill demands

3. Textbook scenario…– Displaced workers move quickly to new opportunities

– New businesses open, taking advantage of slack

– New jobs created are about as good as the old ones

– Concentrated local impacts diffuse nationally

• A small decline in aggregate demand for production workers

• But no local crater where manufacturing once stood




2. Trade permanently alters skill demands

3. Textbook scenario

4. The bad scenario…– If workers are not geographically mobile…

– If they have trouble acquiring new skills…

– If firms do not enter declining locales…

– If public benefits programs induce workers to withdraw from labor market…

– Then economic costs will fall heavily on a few

Why is Free Trade Not a Free Lunch?


Trade Disruption: The Case of Textiles


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U.S. Textile Mill Employment, 1990 - 2017490K

in 1994

380K in 2000

165K in 2007 112K

in 2017

Trade Disruption: The Case of Textiles

• 400K textile jobs is tiny in market of 150M workers

• But textile and apparel jobs geographically concentrated

– 50% of all textile jobs were in 8 Southern states

– 57 counties > 15% of jobs

– Southeastern non-metro counties –Highest U.S. rates of rural poverty

– 25% of workers high school dropouts

• Diffuse benefits, concentrated costs


Learning from Labor-Market Adjustment to Seismic Changes in International Trade

Evidence from the China Shock

1. Do workers quickly find reemployment?

2. Do new businesses pick up the slack?

3. Are new jobs about as good as old ones?

Beyond employment

4. How trade shock have affected U.S. politics

5. Manufacturing as a hub of innovation

Looking ahead

U.S. Manufacturing Employment Sharply Contracts After China Joins the World Trade Organization in 2001


AUTOR ET AL.: THE CHINA SYNDROME 2122VOL. 103 NO. 6

9 percent of US manufacturing imports.2 However, owing largely to China’s spec-tacular economic growth, the situation has changed markedly. In 2000, the low-income-country share of US imports reached 15 percent and climbed to 28 percent by 2007, with China accounting for 89 percent of this growth. The share of total US spending on Chinese goods rose from 0.6 percent in 1991 to 4.6 percent in 2007 (Figure 1), with an inflection point in 2001 when China joined the World Trade Organization (WTO).3 Over the same period, the fraction of US working-age population employed in manufacturing fell by a third, from 12.6 percent to 8.4 per-cent (Figure 1).4 Amplifying China’s potential impact on the US labor market are sizable current-account imbalances in the two countries. In the 2000s, China’s average current-account surplus was 5 percent of GDP, a figure equal to the con-temporaneous average US current-account deficit. US industries have thus faced a major increase in import competition from China without an offsetting increase in demand for US exports.

In this paper, we relate changes in labor-market outcomes from 1990 to 2007 across US local labor markets to changes in exposure to Chinese import compe-tition. We treat local labor markets as subeconomies subject to differential trade shocks according to initial patterns of industry specialization. Commuting zones (CZs), which encompass all metropolitan and nonmetropolitan areas in the United States, are logical geographic units for defining local labor markets (Tolbert and Sizer 1996; Autor and Dorn 2013). They differ in their exposure to import competi-tion as a result of regional variation in the importance of different manufacturing

2 See Table 1. We classify countries as low income using the World Bank definition in 1989, shown in the online Data Appendix.

3 In Figure 1, we define import penetration as US imports from China divided by total US expenditure on goods, measured as US gross output plus US imports minus US exports.

4 The data series for manufacturing/population in Figure 1 is based on the Current Population Survey for work-ers aged 16 to 64. While the reduction in manufacturing employment was rapid during the recessions in 1990–1991 and 2001, there were also declines during the expansions 1992–2000 and particularly 2002–2007. In previous expansion phases of the 1970s and 1980s, the manufacturing/population ratio had increased.

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Figure 1. Import Penetration Ratio for US Imports from China (left scale), and Share of US Working-Age Population Employed in Manufacturing (right scale)

Figure 1. Left scale: Chinese goods as

a share of U.S. goods

expenditure

Right scale: Share of U.S.

working-age population

employed in manufacturing

A Long Decline: The Share of U.S. Employment in Manufacturing, 1939 – 2014


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U.S.ManufacturingEmployment,1939- 2016(1,000s)

1943,16.6 mil

1979,19.7mil 1999,

17.3mil

2007,13.8mil

2010,11.9mil

2016,12.4mil

U.S. Manufacturing Employment Fell by 20% During1999—2007, and by 32% During 1999—2016







Beyond employment



Looking ahead

Trade-Exposed Workers do a Lot of ‘Transitioning’


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Workers Employed at Trade-Exposed Plants in 1991Excess Firm-to-Firm and Employment-to-Non-Employment Transitions

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Cumulatively, they Lose About ½ Year of Expected Annual Income Over the Next 16 Years


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Workers Employed at Trade-Exposed Plants in 1991Cumulative Earnings Losses (% pts) over 1992 - 2007

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Correlation between initial exposure and subsequent exposureCounterfactual with zero trade exposure after job change

Workers Employed at Trade-Exposed Plants in 1991Persistence of Trade Exposure at the Worker Level

Stuck in a Rut: Workers Move From One Trade-Exposed Sector to Another


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Beyond employment



Looking ahead

Concentrated Impact of China Trade Shock: South Atlantic, South Central, Northeast, Great Lakes

Autor, Dorn, Hanson & Wall Street Journal, 2016


Effect of China Trade Shock on Manufacturing Employment Per U.S. Adult by Decade, 1970 – 2007


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ImportsFromChinaandChangeofManufacturingEmploymentinCommutingZones,1970-2007

Effectofan$1000PerWorkerIncreaseinImportsfromChinaduring1990-2007ontheChangeinManufacturingEmploymentasaPercentageoftheWorkingagePopulation

Loss of Manufacturing Employment Not Primarily Offset by Rising Non-Manufacturing Employment


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Effectofan$1000PerWorker IncreaseinImportsfromChinaduring1990-2007onShareofPopulation inEmploymentCategories

Manufacturing Non-Manufacturing Unemployment Not inLaborForce

Effects Much More Severe for Non-College Adults


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Effectofan$1000PerWorker IncreaseinImportsfromChinaduring1990-2007onShareofPopulation inEmploymentCategories

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Induced Rise in Public Transfer Benefits – But Mostly Not Unemployment and Trade Adjustment Assistance

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ImportsfromChinaandChangeofGovernmentTransferReceiptsinCommutingZones(1990-2007)

Effectofan$1000PerWorker IncreaseinImportsfromChinaduring1990-2007onDollarChangeofAnnualTransferReceiptsperCapita







Beyond employment



Looking ahead

Across Local Labor Markets: Male-Female Annual Earnings Gap Rises w/Manufacturing Share

Autor, Dorn and Hanson 2017

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M-F Earnings Gap: Uncorrelated w/Non-Manufacturing Employment, Positively Correlated w/Non-Employment

• 722 Commuting Zones (in 20 bins of equal population size)• Fraction of pop age 18-39 employed in non-manufacturing or not employed• Gap between unconditional male and female median earnings in the CZ


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Marriage Among Women Ages 18 – 39 Positively Correlated with Manufacturing Employment Share

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Impact of a One-Unit Trade Shock on Male-Female Annual Earnings Gap @ P25, P50, and P75


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Proportionate Effect of Unit Trade Shock on Male-Female Annual $ Gap: % of Initial Male Annual Earnings


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Drug/ Alc Poison

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Male Shock Female Shock

Trade Shocks Raise Incidence of Drug and Alcohol Deaths among Men: Mortality per 100K Adults Ages 20 – 39


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AllPoorHouseholdTypes

Trade Shocks Raise Incidence of Poverty: Impact of a Unit Trade Shock on Fraction of Children <18 Living In Poverty







Beyond employment



Looking ahead

Political Polarization: Distribution of Republicans and Democrats on a 10-item scale of political values

20

www.pewresearch.org

Democrat; while 17% of Democrats were more conservative than the median Republican. Today, those numbers are just 4% and 5%, respectively.

As partisans have moved to the left and the right, the share of Americans with mixed views has declined. Across the 10 ideological values questions in the scale, 39% of Americans currently take a roughly equal number of liberal and conservative positions. That is down from nearly half (49%) of the public in surveys conducted in 1994 and 2004. As noted, the proportion of Americans who are now more uniformly ideological has doubled over the last decade: About one-in-five Americans

Republicans Shift to the Right, Democrats to the Left Distribution of Republicans and Democrats on a 10-item scale of political values

Source: 2014 Political Polarization in the American Public

Notes: Ideological consistency based on a scale of 10 political values questions (see Appendix A). Republicans include Republican-leaning

independents; Democrats include Democratic-leaning independents (see Appendix B).

PEW RESEARCH CENTER

Pew Research Center, 2016


Political Polarization: Republican and Democratic Worldviews Diverging


Pew Research Center, 2016

74

46

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1994 2004 2014

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1994 2004 2014

Rep/Rep lean

Dem/Dem lean

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Growing Gaps between Republicans and Democrats % who take the more conservative position on each question in the ideological consistency scale

Government regulation of business usually does more

harm than good Government is almost always

wasteful and inefficient

Poor people today have it easy because they can get

government benefits without doing anything in return

The government today can't afford to do much more to

help the needy

Blacks who can't get ahead in this country are mostly

responsible for their own condition

Immigrants today are a burden on our country

because they take our jobs, housing and health care

Most corporations make a fair and reasonable

amount of profit

Stricter environmental laws and regulations cost too many jobs

and hurt the economy

Source: Pew Research Center (2014).

Figure 6

Democrats.

On every one of these eight measures, we see the two lines diverging in the last ten years.

On some, such as agreeing that “Government regulation of business usually does more harm than

good,” or “Government is almost always wasteful and inefficient,” the divergence is striking.

The pattern becomes even starker if we aggregate these separate issue questions into a single

index of conservative or liberal views. Figure 7 shows the distribution of these indices for Repub-

licans and Democrats. The degree of overlap falls sharply from 2004 to 2014. Figure 8 shows that

this is even more true if we focus on the subset of people who say they are politically engaged

(vote regularly, follow government affairs).

How can the overall distributions on issues remain unchanged while the distributions for Re-

11

74

46

75

59 48

40

1994 2004 2014

64

45

68

46 38

29

1994 2004 2014

Rep/Rep lean

Dem/Dem lean

63 48

66

44

22 28

1994 2004 2014

58 44

73

37 24

34

1994 2004 2014

66 72

79

53 49 50

1994 2004 2014

64

45 46 62

41 27

1994 2004 2014

54 49 56

35 30 27

1994 2004 2014

39 37

59

29 24 24

1994 2004 2014

Growing Gaps between Republicans and Democrats % who take the more conservative position on each question in the ideological consistency scale

Government regulation of business usually does more

harm than good Government is almost always

wasteful and inefficient

Poor people today have it easy because they can get

government benefits without doing anything in return

The government today can't afford to do much more to

help the needy

Blacks who can't get ahead in this country are mostly

responsible for their own condition

Immigrants today are a burden on our country

because they take our jobs, housing and health care

Most corporations make a fair and reasonable

amount of profit

Stricter environmental laws and regulations cost too many jobs

and hurt the economy

Source: Pew Research Center (2014).

Figure 6

Democrats.

On every one of these eight measures, we see the two lines diverging in the last ten years.

On some, such as agreeing that “Government regulation of business usually does more harm than

good,” or “Government is almost always wasteful and inefficient,” the divergence is striking.

The pattern becomes even starker if we aggregate these separate issue questions into a single

index of conservative or liberal views. Figure 7 shows the distribution of these indices for Repub-

licans and Democrats. The degree of overlap falls sharply from 2004 to 2014. Figure 8 shows that

this is even more true if we focus on the subset of people who say they are politically engaged

(vote regularly, follow government affairs).

How can the overall distributions on issues remain unchanged while the distributions for Re-

11

Gerrymandering: North Carolina District 12:“Most Gerrymandered” Distinct in America


Effect of Dialing Back Trade Shock by 50% on Composition of House of Representatives, 2002 – 2010

New York Times, 4/26/2016


What about the Rise of Donald J. Trump?


Effect of Dialing Back the China Trade Shock on Trump’s Vote Share in Swing States in 2016

Wall Street Journal, 11/22/2016







Beyond employment



Looking ahead

Sharp Fall in Successful Patent Applications by Import-Competing U.S. Firms After 2001


What have we learned?

1. Labor market adjustment is slow and costly

2. Manufacturing employment is ‘different’ and important

3. Trade shock has affected U.S. politics

• Contributed to polarization of House of Representatives 2000 – 2010

• Contributed to Donald J. Trump electoral victory in 2016

4. More than just ‘about jobs’ – impacts innovative capacity over longer term



1. China’s rise has been fabulous for global welfare

2. For U.S., a challenge—but there’s no going back– In part, China Shock just accelerated the inevitable

– Not likely to recur —China has developed

3. Shock has laid bare our labor market challenges– Declining labor force participation and earnings of non-college adults

– Lost appetite for globalization

4. We were too sanguine about ‘free trade = free lunch’ story– And woefully unprepared accordingly

5. Will the next big shock emanate from Silicon Valley not China?– And can we be bettered prepare next time…?

Prospects and Policies


Thank you

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