When Congress voted to normalize trade relations with China at the beginning of the century, US manufacturers pretended to be a stream of cheap goods flowing into US ports.
Instead, they flooded. Imports from China almost tripled between 1999 and 2005, and American factories were unable to compete with higher wages and stricter safety standards. The “Chinese shock” as it became known later, wiped out millions of jobs afterwards, leaving lasting scars in communities from Michigan to Mississippi.
For President Trump and his supporters, these unemployment is an object lesson in the damage caused by decades of US trade policy. The damages promise to help his tariffs reverse. On Wednesday, he further raised his import obligations from China, well over 100%, even if he suspends sudden tariffs he imposed on other trading partners.
Few economists support the idea that the US should try to regain manufacturing jobs in a massive manner. I believe that tariffs are an effective tool to do so.
But economists who studied the issue argue that Trump misunderstood the shock nature of China. The real lesson of the episode is not about trade, but the victims of rapid economic change that could take on workers and communities, and that he doesn't understand that Trump will repeat and repeat mistakes he claims he has vowed.
“For the past 20 years, we've been asking about the Chinese shock and how cruel it is and how people can't adjust,” said Scott Lincicom, a trade economist at the Cato Institute, a libertarian research institute. “And finally, after most of the places have moved on, it's now a shock again.”
Reconsidered Legacy
The first thing to understand about China's shock is that almost every part of the story at the beginning of this article is oversimplified.
Factory employment had declined in the proportion of employment for decades before China joined the World Trade Organization in 2001. These losses have accelerated since around 2000, especially in labor-intensive industries such as clothing and furniture manufacturing, but not all of that declines are due to competition with China or more generally to US trade policy.
Technology also played a major role by allowing factories to produce more goods with fewer workers. Economists disagree exactly with regard to the extent of decline caused by various factors, but found that if China was even locked out of the WTO from a 2016 paper that produced the phrase “Chinese shock,” then, like in 2000, if the US was still locked out of half a million papers, the US still found that half a million imports had graduated from researchers.
What set the impact of China was not that it was uniquely expensive. The idea that trade has winners and losers was recognized by economist David Riccardo in the early 19th century. Rather, it was the speed and concentration of those losses.
Communities that relied heavily on labor-intensive manufacturing saw those jobs evaporate in a few years. In 2000, the furniture industry in Hickory, North Carolina employed more than 32,000 people, a fifth of the area's private workers. Within ten years, that number was reduced by nearly 60%. This is a devastating blow that has been repeated in many local communities.
Standard economic theory determined that people and places struck by these losses should adapt relatively quickly. Investors would have filmed abandoned factories and factories at a low cost and found more productive uses for them. The laid-back workers should have learned new skills and switched to a fast-growing industry. And if such work was not available nearby, they should have found work elsewhere.
That didn't happen. New, well-paid industries were born, but not in places that were hit hardest by manufacturing unemployment. The laidback workers were unable to move in search of opportunities, and they struggled to compete for some of the good jobs remaining in the community. Many of them needed university degrees.
Instead, they found work in service jobs that paid a portion of the wages of their previous factories or left the workforce. The employment rate for men fell sharply. The rates of poisoning and early mortality have skyrocketed.
This is a central insight into Chinese shock literature. Change is difficult. Rapid change is difficult.
As economic changes take place over decades, they give workers and communities the opportunity to coordinate. Local leaders can recruit businesses in new industries. Parents can encourage their children to pursue a variety of jobs. These gradual adaptations do not work when the entire industry is closed in a short time.
“The labor market is adjusted for generations,” says David Autor, a MIT economist who co-author of the original Chinese shock paper and continues to study it. “That doesn't happen within a career.”
Still, the shock in China took place over the years. Trump is trying to turn that around in a few months.
The tariffs he announced this month would have collided with almost every product imported from almost every US trading partner. And, after investors rebelled, he delayed many of those duties, but what he has maintained remains in the greatest changes in the US trade policy of a generation.
Such a major disruption could have devastating consequences, including the industry that Trump says he wants to help. Companies such as automaker Stellantis and appliance maker Whirlpool have begun to announce thousands of layoffs. (Whirlpool considered a move towards weak demand rather than tariffs, but the survey shows that uncertainty about tariffs and its impacts is cooling consumer spending.) If Trump sticks to his policies, Brookingsmulo's Mark Muro, who studied how manufacturing decline affected the local economy, is likely to continue with more cuts.
“It could have an impact like the Chinese shock, and perhaps even more serious,” he said.
This time the shock looks different. The losers of China's import boom were very concentrated. Winners – all American consumers were essentially – spreading. This time the opposite applies. Several industries, such as steel manufacturing, will benefit, but the entire economy will suffer.
Retailers, big and small, are squeezed by consumers who have high import prices on one side and can withstand inflation on the other. Farmers and other exporters may be subject to retaliatory tariffs from US trading partners. Automakers, tech companies and other manufacturers with complex global supply chains have a particularly hard time adapting to the rapidly changing, uncertain trading system.
Almost every US manufacturer of all sizes relies on import to some extent when it comes to parts, raw materials, or equipment used in factories. In theory, tariffs, subsidies and other incentives are combined in a way that may encourage governments to urge businesses to return more of their supply chain to the US.
But that takes time. Companies need to build new factories and find new suppliers. This must be expanded to meet new demand. For parts and equipment that are no longer made in the country, companies need to rebuild their supply chains from scratch. And the US workforce already has a shortage of many skilled manufacturing workers. Training a new generation of welding machines, CNC mechanics and CAD technicians will take years.
“Developing factories, supply chains, industrial clusters, labor specializations, and more takes time,” Muro said. “It's not so plausible to think that one economic order can be turned off and another can be turned on.”
Even supporters of Trump's trade policy say it's better to phase out tariffs to give businesses time to adjust. Oren Cass, a conservative policy expert and one of the most prominent proponents of tariffs, wrote in the New York Times this month that an all-out approach is “necessary and unwise.”
“Turning supply chains into the biggest disruption and avoiding them by placing the highest burden faster than a company can lead to the excessive costs associated with it,” Cass wrote.
Signs of recovery
Trump's attempts to rewind the clock with trade come just as the scars of China's shock appear to be fading.
Cities, whose industrial bases have been slashed by competition with China or from the waves of previous industry decline, have begun to attract new industries and workers. A recent study by economists at the Upjohn Institute in Kalamazoo, Michigan found that employment growth in recent years has actually been stronger in these tortured counties than the high-tech hubs that were winners in the early stages of globalization.
One of the authors of the study, Timothy J. Baltic said that the location benefits them not through a wide range of national policies like tariffs but through long-term strategies tailored to the individual strengths of the community. Grand Rapids, Michigan developed a specialist in medical device manufacturing. The Lehigh Valley, Pennsylvania, took advantage of its location to become a logistics hub.
“To truly revitalize our community, we need long-term investments in strategies that take into account local characteristics,” Baltic said. “One size doesn't fit all. Different local communities need a different strategy.”
Hickory, a North Carolina community, was ravaged by the loss of the furniture industry and found itself in a surplus of cheap hydroelectric power generation after the factory and Textile Mills left town. This allowed us to attract Apple data centers, a species of what became a miniature high-tech hub. The community also invested in amenities to make them attractive to young workers. Today, the old factory building is being redeveloped as a restaurant, brewery and loft style office.
“There's a sudden, cool company, cool job opportunities, a changing atmosphere within the city itself,” said Scott Miller, president of Catawba County Economic Development Corporation. Over the past decade since China's shock, local unemployment rates above the national rate have been consistently below that mark.
Still, Miller says his experiences in the early 2000s showed how vulnerable the community is to rapid economic change. Many local businesses may be open to Trump's insistence that the economy needs to endure short-term pain to achieve long-term revitalization. But Miller said, “I can see some people asking, too, change has to make this happen soon?”
Communities like Hickory have been recovering for over 20 years since the last major trade shock. Can Trump's confusion make them pass it again?
“I think there are similarities,” Miller said. “It took me a long time to get out of that hole.”
