Economic and Political Consequences of China s Rise: Lessons from the China Shock

Economic and Political Consequences of China s Rise: Lessons from the China Shock David Autor Ford Professor and Associate Head MIT Department of Economics Rodolfo Debenedetti Lecture Milan. 3 May 2018

China s Historic Rise as a World Manufacturing Power Autor, Dorn, Hanson 2016 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 1

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 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 2

China s Special Economic Zones (SEZs) DAVID AUTOR LESSONS FROM THE CHINA SHOCK 3

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 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 4

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 There s the Rub Trade normally creates winners and losers Diffuse benefits, concentrated costs John Barrymore as Hamlet in 1922 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 5

Why Is Free Trade Not a Free Lunch? 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 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 6

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 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 7

How Does this Work in Reality? Good v. Bad Scenario 1. The good 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 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 8

How Does this Work in Reality? Good v. Bad Scenario 1. The good scenario 2. 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 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 9

U.S. Manufacturing Employment Sharply Contracts After China Joins the World Trade Organization in 2001 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 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 10

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? 4. Are there broader social consequences? 5. Have trade shock polarized politics?

A Long Decline: The Share of U.S. Employment in Manufacturing, 1939 2018 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 12

But the 2000s Were Different: U.S. Manufacturing Emp Fell by 22% Between 1999 2007, by 34% Between 1999 2010 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 13

Manufacturing is Highly Regional: Manufacturing Employment Shares Among Adults Ages 21 55 in 2000 Charles, Hurst, and Schwartz 2018 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 14

Net Loss of Manufacturing Jobs Between 2000 2016 Among Adults Ages 21-55: One of Every Four Jobs Charles, Hurst, and Schwartz 2018 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 15

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 there broader social consequences? 4. Have trade shock polarized politics?

Trade-Exposed Workers do a Lot of Transitioning : Is That a Problem? Excess Job Changes DAVID AUTOR LESSONS FROM THE CHINA SHOCK 17

Cumulatively, they Lose About ½ Year of Expected Annual Income Over the Next 16 Years Cumulative Earnings Losses DAVID AUTOR LESSONS FROM THE CHINA SHOCK 18

Stuck in a Rut: Workers Move From One Trade-Exposed Sector to Another Correlation Between Initial and Subsequent Trade Exposure (1992 = 1.0) DAVID AUTOR LESSONS FROM THE CHINA SHOCK 19

Disproportionate Losses: % Annual Earnings Losses Much Larger Among Initially Low Earnings Workers DAVID AUTOR LESSONS FROM THE CHINA SHOCK 20

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 there broader social consequences? 4. Have trade shock polarized politics?

Concentrated Impact of China Trade Shock: South Atlantic, South Central, Northeast, Great Lakes Autor, Dorn, Hanson & Wall Street Journal, 2016 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 22

Loss of Manufacturing Employment Not Offset by Rising Non-Manufacturing Employment DAVID AUTOR LESSONS FROM THE CHINA SHOCK 23

Effects Much More Severe Among Non-College Adults DAVID AUTOR LESSONS FROM THE CHINA SHOCK 24

Men Leave Manufacturing + Non-Manufacturing Women Partly Offset Manufacturing Losses in Other Jobs DAVID AUTOR LESSONS FROM THE CHINA SHOCK 25

Large Rise in Public Transfer Benefits But Mostly Not Unemployment and Trade Adjustment Assistance DAVID AUTOR LESSONS FROM THE CHINA SHOCK 27

Consistent Evidence Emerging from Many Countries 1. Norway Ashournia, Munch, and Nguyen 14 Balsvika, Jensena, Salvanes 15 2. Denmark Utar 16 3. Brazil Costa, Garred, and Pessoa 16 Dix-Carnerio and Kovak 17 4. Spain Dosono, Martín, and Minondo 15 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 28

Norwegian Manufacturing Employment and the China Shock Balsvika, Jensena, Salvanes 2015 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 29

Job Polarization in Denmark in 2000s Driven by Manufacturing Decline: End of Multi Fiber Agreement Utar 2016 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 30

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 there broader social consequences? 4. Have trade shock polarized politics?

Disproportionate Losses: Effect of Unit Trade Shock on Male- Female Annual Gap as a % of Initial Male Annual Earnings Effect of Trade Shock on M-F Earnings Gap as % of Male Earnings Proportionate losses for men are much larger below the 40 th percentile of the annual earnings distribution DAVID AUTOR LESSONS FROM THE CHINA SHOCK Earnings Percentile 32

Fall in Employment, Rise in School Enrollment, and Rise in Idleness Among Men: Young Adults Ages 18 25 Idleness DAVID AUTOR LESSONS FROM THE CHINA SHOCK 33

Trade Shock Raises Incidence of Drug and Alcohol Deaths among Men: 10-Year Mortality per 100K Adults Ages 20 39 10-Yr Mortality Rates in 1990 Males: 2,113 per 100K Females: 934 per 100K DAVID AUTOR LESSONS FROM THE CHINA SHOCK 34

Trade Shocks Raises Incidence of Drug and Alcohol Deaths among Men: 10-Year Mortality per 100K Adults Ages 20 39 10-Yr Mortality Rates in 1990 Males: 2,113 per 100K Females: 934 per 100K DAVID AUTOR LESSONS FROM THE CHINA SHOCK 35

Coming Apart: Effect of Trade Shock on Marital Status and Household Composition of Women Ages 18 39 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 36

Collateral Impacts: Effect of Trade Shock on Fertility and Household Structure Among Young Women, Children <18 Impact of Trade Shock 1. Reduces fertility 2. Reduces % of women who are mothers 3. Raises % of mothers who are unmarried 4. Raises % of children in poor households DAVID AUTOR LESSONS FROM THE CHINA SHOCK 37

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? 4. Have trade shock polarized politics?

Political Polarization: Distribution of Republicans and Democrats on a 10-item scale of political values Pew Research Center, 2017 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 39

Political Polarization: Distribution of Republicans and Democrats on a 10-item scale of political values Pew Research Center, 2017 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 40

Gerrymandering: North Carolina District 12: Most Gerrymandered Distinct in America DAVID AUTOR LESSONS FROM THE CHINA SHOCK 41

Effect of Trade Shock on Electoral Turnover in U.S. House Of Representatives, 2002 2010 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 42

Trade Shock Leads to Election of More Ideologically Extreme Candidates, 2002 2010 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 43

Trade Shock Conservatives Win in Majority White Non- Hispanic Districts, Liberals Win in the Remainder, 2002 2010 Majority White Non-Hispanic Districts Majority Non-White and/or Hispanic Districts DAVID AUTOR LESSONS FROM THE CHINA SHOCK 44

Effect of Dialing Back Trade Shock by 50% on Composition of House of Representatives, 2002 2010 New York Times, 4/26/2016 DAVID AUTOR LESSONS FROM THE CHINA SHOCK 45

What about the Rise of Donald J. Trump? DAVID AUTOR LESSONS FROM THE CHINA SHOCK 46

How Might the 2016 U.S. Presidential Election Looked Were it not for the China Trade Shock? DAVID AUTOR LESSONS FROM THE CHINA SHOCK 47

Cross-National Evidence Reaches Similar Conclusions: Trade Shocks Raise Voter Support for Right-Wing Parties Support for German far right parties Dippel, Gold, Helbich 15 Western Europe: Colantone & Stanig 18 Legislative elections in Western Europe, 1988-2007 Stronger regional exposure to the China shock predicts: General shift to the right in the electorate Increasing support for nationalist, isolationist, and radicalright parties Also: Colantone-Stanig 18 on China Shock and Brexit DAVID AUTOR LESSONS FROM THE CHINA SHOCK 48

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? 4. Have trade shock polarized politics?

Prospects and Policies 1. China s rise has been fabulous for global welfare 2. For the developed world 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 many labor market challenges Declining labor force participation and earnings of non-college adults Lost appetite for globalization 4. Countries were too sanguine about free trade = free lunch story And woefully unprepared accordingly 5. The next big shock may emanate from Silicon Valley not China! See Colantone-Anelli-Stanig 18. Will we be bettered prepare next time? DAVID AUTOR LESSONS FROM THE CHINA SHOCK 50