Q&A: ‘China shock,’ tariffs and American manufacturing

UNIVERSITY PARK, Pa. — International trade, tariffs and domestic manufacturing topped news stories last week. Bradley Setzler, Strumpf Early Career Professor of Economics at Penn State, discussed in the following Q&A the recent history of U.S.-China economic relations and the impact on American workers.

Q: What is the “China shock”?

Setzler: China was admitted into the World Trade Organization in 2001, and within a decade, China emerged as a global superpower in the export of manufactured goods. Initially, Chinese manufacturers focused on products like textiles, furniture, toys, some electronics equipment, apparel, and shoes and leather goods. They quickly exported these products in large numbers, and the American workers who had been producing these goods at the time suddenly found it difficult to compete with the low prices ofChinese producers. An implication for American workers employed in industries like textiles, furniture and apparel was the number of jobs available in these sectors declined fairly quickly over the two decades after China’s rise. 

My colleagues and I found that being in a region that received an above average amount of exposure to this import competition from China resulted in a loss of one in seven local manufacturing jobs relative to less exposed regions. If a region experienced a high degree of exposure — say your region was very specialized in producing furniture or textiles — it could be twice that or even three times that relative to other regions. So, you could lose two out of seven jobs, or even three out of seven jobs in local manufacturing.

Q: What geographic areas in the U.S. got hit the hardest?

Setzler: A lot of different regions. It wasn't overly concentrated in just one area. Different pockets of the U.S. were specialized in different types of manufacturing, and many small towns were built around one particular type of manufacturing. As a result, the rise of these Chinese imports could hit some towns but then not hit the town down the road. So, the shock was sort of picking off different towns and leaving others alone based on where the manufacturing happened to be, and which goods they happened to manufacture, whether or not they were the types of goods that China began producing.

Q: Who were the workers most affected?

Setzler: Manufacturing at that time was the perfect example of a skilled job you could do for a high wage, even without a college degree. We found a big loss in high-paying jobs for workers who entered the manufacturing workforce directly after high school. It became much harder after this for people without a college degree to get a high wage. The lost jobs equally hit men and women. I'm not sure that's really been part of the story before, but it turns out a lot of those American jobs, say in textile manufacturing, were held by women, and so women lost jobs in equal numbers to men. But, we found that women recovered more jobs in the services sector. 

That's the other half of this story. In the first 10 years after China began exporting these types of goods, the U.S. experienced job loss in manufacturing but no recovery. Then in the 2010s, these U.S. regions started recovering, but they didn't recover jobs in manufacturing. Manufacturing never recovered, at least over the data that we have available through 2019. It was the services sector that made up for the lost jobs in manufacturing, especially in health care, education, retail and restaurants.

Older people that already had manufacturing jobs, for the most part, were able to keep those jobs. Only around 1% of the people who already had manufacturing jobs lost their positions. Instead, it was the new graduates, the people coming out of high school looking for their first job, who lost opportunities in manufacturing. In the past, they could have potentially gotten a high-paying job in manufacturing, even without a college degree. Those new people entering the labor market could no longer find jobs in manufacturing, and manufacturing stopped creating entry-level positions for new graduates.

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

Setzler: We call it “aging in place.” The individuals already in those jobs sort of hunkered down. They were able to keep their jobs, not move location, not move to any other job. If they didn't have to compete with China, we might have seen more job-hopping and moving up the job ladder into higher paying jobs or even getting promotions within their same job. We found that those opportunities vanished for these workers. Instead, the ones who stay in their manufacturing jobs were stuck at whatever wage level they were already receiving before the China shock. We found a big loss in opportunities to get promoted and receive high paying jobs over the course of their careers.

Q: Let’s talk about the recovery. How different were the new service sector jobs compared to the manufacturing jobs?

Setzler: We found that the service sector jobs tended to be low paying. We essentially replaced jobs that were in the top third of the earnings distribution with jobs in the bottom third of the earnings distribution. But also, even if you condition on the type of worker — say, a college-educated worker, who would tend to get a higher wage than a worker without a college degree — comparing different college-educated workers to one another, the service sectors that experienced the most growth tended to be on the lower paying end. We call these “low premium” jobs — they pay relatively less than what that person might have made in a different industry.

Q: Given the renewed focus on international trade, trade deficits and tariffs, what does your research say about what can best help the American worker?

Setzler: There's a fundamental trade off. By allowing more international trade, we allowed low price goods to enter the country, and many people benefited from being able to go to a large department store and purchase textile goods, apparel, toys, shoes and electronics at lower prices than they used to when they were buying from American companies. There could be substantial benefits to that, that many people were able to afford goods they couldn't afford without the imports from China. But in doing so, lowering the number of jobs for American workers was the losing side of that deal that our research highlights. Which one of those is more important — keeping the American job in, say, textiles versus being able to buy cheaper textiles — is a distributional question. Who is hurt and who is helped by that policy? That's a lot of what the national debate around trade has been about: there are cheaper goods, but was it really worth it, given the jobs that were lost?

Q: Are we headed for a different kind of China shock? How would that affect Americans?

Setzler: There has been a lot of interest in the possibility of a second China shock, which would be more at the higher end of consumption — say, electric vehicles, battery technology and solar panels — that we might think of as supporting relatively high paying tech jobs in the U.S. China's rise in producing these goods — which some call the “China Shock 2.0” — could compete with relatively high paying tech jobs in the U.S. This could look very different from the first China Shock because higher skilled workers tend to be more mobile and may have an easier time searching for new jobs, and they also may have more savings to live off of while weathering job loss. 

Aside from hitting a different group of workers, China Shock 2.0 could play out differently because the US government has become much more willing to impose protectionist trade policies in recent years. Support for protectionist policies has received substantial bipartisan support, with the Biden administration maintaining many of the tariffs imposed during the first Trump administration, and with the second Trump administration dramatically raising tariffs imposed on countries throughout the world. Tariffs are a blunt instrument for raising the prices paid by Americans for Chinese and other foreign goods, discouraging imports and thus potentially preserving American jobs in specific industries, but at the cost of consumers potentially missing out on cheaper prices at the store.