Q&A: “China Shock”, tariffs, American manufacturing industry

Last week, international trade, tariffs and domestic manufacturing came to the top. In the Q&A below, Bradley Setzler, an early career professor in Pennsylvania’s economics, discussed the recent history of US-China economic relations and its impact on American workers.

What is the “China Shock”?

China was hospitalized by the World Trade Organization in 2001, and within ten years it emerged as a global superpower in exporting manufactured goods. Initially, Chinese manufacturers focused on products such as textiles, furniture, toys, some electronics, apparel, shoes, and leather products.

They exported these products in large quantities and suddenly realized that the American workers who were producing these products at the time were difficult to compete with the low prices of Chinese producers. The implication for American workers employed in industries such as textiles, furniture and apparel is the number of jobs available in these sectors, which fell quite rapidly 20 years after China’s rise.

My colleague and I found that when we were in areas that received above average exports from this import competition from China, we lost one in seven local manufacturing compared to areas with less exposure. If your area has experienced high exposure – if your area was very specialized in the production of furniture and textiles, it could be twice or triple the other areas. So you could lose two of the seven jobs or three of the seven jobs in your local manufacturing industry.

Which geographical region in the US has been hit hardest?

Many different regions. They were not overly concentrated in just one area. Different pockets in the United States specialize in manufacturing of different types, with many small towns being built around one particular type of manufacturing. As a result, the rise of these Chinese imports could hit several towns, but did not visit the road.

So the shock picked up different towns and left only others based on where the manufacturing industry was, which goods were manufactured, and whether it was the type of goods China began to produce.

Who was the most affected workers?

Manufacturing at the time was the perfect example of skilled jobs that could be done for wages, even without a university degree. We found great losses in high-paid jobs for workers who joined the manufacturing workforce shortly after high school.

It has become much more difficult after this for people without university degrees to get high wages. The lost work equally hit men and women. I don’t know if that was really part of the story, but it was held by women that much of the American job that women held in textile manufacturing, so women lost their jobs to the same number of men. However, we found that women have recovered more jobs in the service sector.

That’s the other half of this story. In the first decade since China began exporting these types of goods, the US lost its job in manufacturing, but there was no recovery. Then, in the 2010s, these US regions began to recover, but did not recover from their manufacturing jobs. Production never recovered with data available until at least 2019. It was the services sector that compensated for lost employment in the manufacturing industry, particularly in healthcare, education, retail and restaurants.

Elderly people who were already working in manufacturing were able to maintain those jobs in most cases. Only about 1% of those who were already working in the manufacturing industry lost their positions. Instead, it was a new graduate, looking for his first job that came out of high school and lost manufacturing opportunities. In the past, there was a chance that they could get a well-paid job in manufacturing without a university degree. New people entering the labour market were no longer able to find jobs in the manufacturing industry, and manufacturing has stopped creating entry-level positions for new graduates.

What happened to 99% who were already in those jobs?

We call it “aging.” Individuals who are already in those jobs are kind of like. They were able to maintain their work rather than moving from place to place, to other jobs. If they didn’t have to compete with China, we might have seen more work, raise the ladder of work and even get promotions in their same work.

It turns out that these opportunities have disappeared for these workers. Instead, those who stayed in manufacturing jobs were stuck at wage levels already underway before the Chinese shock. We felt a great loss in the opportunity to get promoted and receive a well-paid job in their careers.

Let’s talk about recovery. How different are jobs in the new service sector compared to manufacturing jobs?

We found that services work tends to be low paying. Essentially, we replaced employment that was in the top third of revenue shares with employment that was in the bottom third of revenue shares.

Furthermore, even if we conditioned the type of university-educated workers who tend to earn higher wages than workers without a university degree, when comparing different university-educated workers with one another, the service sector that experienced the most growth tended to be the end of low wages. We call these “low premium” jobs. They pay relatively fewer than what the person might have made in another industry.

Given the new focus on international trade, trade deficits and tariffs, what does your research say about what can best help American workers?

There are basic trade-offs. By allowing more international trade, we have allowed low-priced goods to enter the country. Many people benefited from being able to go to large department stores and purchase textile products, apparel, toys, shoes and electronics at a lower price than they would have when they were buying from American companies. That may have a great advantage. This is because many people could afford to buy products that they couldn’t afford without imports from China.

But reducing the number of jobs for American workers in doing so was the loser of that deal, which our research highlights. One of them is more important, and maintaining American jobs by being able to purchase textiles and cheaper textiles, for example, is a matter of distribution. Who is injured and who can help with that policy? That’s a lot of the nationwide debate about trade. There are cheap products, but was it really worth it given the lost work?

Are we heading towards a different kind of China shock? How does that affect Americans?

There was much interest in the possibility of the second China shock. This will result in more consumption, such as electric vehicles, battery technology, solar panels, and more, which you might think to support relatively high-paying technology employment in the United States.

Some people who call it “Chinese Shock 2.0” could potentially allow increased production of these commodities to compete with relatively high-paid technology employment in the United States.

Aside from hitting another group of workers, China’s shock 2.0 could unfold differently as the US government has been willing to impose protectionist trade policies in recent years. Support for protectionist policies has received considerable bipartisan support, as the Biden administration maintained many of the tariffs imposed during the first Trump administration, and the second Trump administration dramatically increased tariffs imposed on countries around the world.

Tariffs are blunt instruments as they could raise prices paid by Americans for Chinese and other foreign products, discourage imports, and thus maintain American employment in certain industries, but could result in consumers missing cheaper prices in stores.