In December 1978, Chinese leader Deng Xiaoping introduced economic reforms that radically altered the Chinese economy by strengthening trade and cultural ties with the West.
Beginning in the 1990s, these reforms put China on a course to become what it is today: a nation with a vibrant, predominantly market-driven economy that is also second in the world.
Since then, U.S. residents have benefited from cheap products exported from China, but many communities that produced products competing with Chinese manufacturing exports have experienced job losses and economic downturns.
This negative effect on US manufacturing jobs from Chinese exports is often referred to as the “China shock.” A recent study found that although this shock stabilized around 2010, its damaging sequelae continued for many years beyond, especially in certain industries such as furniture, games and toys and bicycles or toy cars for children.
I am an economics professor who has conducted research on China, and understanding when these trade effects ended allows me and other researchers to examine what long-term demographic aftershocks are occurring in the American communities and how to best manage them. These policy prescriptions can be applied to other industries that experience rapid change in employment due to macroeconomic trends.
How China Won So So So Quickly
As part of its increased openness to the world, China joined the World Trade Organization – the international body that sets the rules for world trade – in 2001. Believing that increasing economic liberalization would lead to political liberalization in China, the United States began to engage in trade with the country.
International trade theory teaches that free trade between nations makes them better than no trade at all. And recent research points out that the economic gains for the United States from trade in general have been positive.
But the gains have been small, adding between 2% and 8% of gross domestic product.
Yet trade with China caused a significant economic shock involving job losses and declining human well-being in several parts of the United States, particularly in the Deep South and some states in the Midwest.
The source of this shock is China’s comparative advantage in manufacturing, especially in labor-intensive goods. Comparative advantage is the ability of a country to produce a good or service at a lower cost than that of its trading partners. China has an abundant supply of labor relative to capital and natural resources.
When China began to liberalize its foreign trade, there was a dramatic increase in exports of manufactured goods and a concomitant economic shock to the US economy. This is because the products made in the United States could not compete with the cheap Chinese products that were flooding the market.
The US economy lost 1.5 million manufacturing jobs between 1980 and 2000, and 5 million more between 2000 and 2017.
This drop in manufacturing employment has not been matched by the same number of job gains in other sectors of the US economy.
The impact lasts
Today, even with the end of the manufacturing push in China, its effects in the United States have continued.
A decade after the Chinese trade shock eased around 2010, the United States still has a large number of local economies in which studies show that social structures, including the institution of marriage, are unraveling because that workers have lost their jobs and have no stable wages they can live with.
This lack of wages subsequently led to a decline in demand for local goods and services and in housing values and property tax revenues. There has also been an increase in the number of people receiving government assistance such as Medicaid.
Economists generally support “people-based” rather than “place-based” policies. People-based policies focus on people in distress, with a frequent emphasis on recycling, while place-based policies focus on investing in the communities where workers live, such as revitalizing centers. cities.
Investments in communities hard hit by Chinese imports have tended to focus on people-centered policies, as economists generally believe that investing in workers can help them leave troubled places with few opportunities. jobs for new places with better labor markets, schools and other amenities.
The best-known population-based US government program that helps workers displaced by trade competition is Trade Adjustment Assistance for Workers. It helps workers with vocational training, relocation assistance, subsidized health insurance and extended unemployment benefits.
Yet, compared to the scale of the job losses, the program is small, offering too little relief to most workers who lost their jobs due to import competition in the 1990s and 2000s.
Nobel laureates Abhijit Banerjee and Esther Duflo stressed that the TAA program needs to be significantly expanded. Although the United States House of Representatives is taking action to re-authorize and expand the TAA program, it is still too early to say what the final legislation will look like.
Even though economists favor people-centered policies, evidence shows people made redundant due to competition from imports from China often do not move due to unaffordable housing, childcare costs and uncertainties associated with finding a new job.
And abandoned places never completely die. Instead, in such places fewer people get married and have children. More children are living in poverty, alcohol and drug abuse is on the rise, and young men are less likely to graduate from college.
Therefore, an overhaul of economic policy is probably now needed in the United States to focus on two key points: the need to provide adequate assistance to workers during mass layoffs and to recognize that such assistance, quite frequently, will need to be based on location.
Two lessons for the future
Like the Chinese trade shock, the decline of the coal industry in the United States, from 1980, and the Great Recession, from 2007 to 2009, were also massive layoffs.
Although local economies exposed to the Great Recession quickly recovered to their pre-recession employment rates, the decline of coal and the Chinese trade shock both resulted in lasting job losses, lower incomes and a slow decline in population.
Policymakers could apply the lessons learned from this trade shock to respond effectively to the next likely event of mass layoffs. As economies move away from fossil fuels, we will continue to see job losses in the coal and petroleum mining industries.
While the increased use of renewables is likely to generate new jobs, there is no guarantee that they will be near where the localized job losses occur. Therefore, the prospect of localized large-scale job losses remains. And new policies are needed to improve job growth in regions affected by protracted unemployment.
Evidence in the United States and Europe shows that political support for populist nationalists tends to be greater in regions that have suffered large trade-related job losses.
If policies that promote job growth in struggling regions are not implemented, we might see more populist nationalists in power in the United States.
Amitrajeet A. Batabyal is Arthur J. Gosnell Professor of Economics at the Rochester Institute of Technology. This article is republished from The Conversation under a Creative Commons license. Read the original article.