The first time China upended the U.S. economy, between 1999 and 2007, it helped erase nearly a quarter of all U.S. manufacturing jobs. Known as the China Shock, it was driven by a singular process — China’s late-1970s transition from Maoist central planning to a market economy, which rapidly moved the country’s labor and capital from collective rural farms to capitalist urban factories. Waves of inexpensive goods from China imploded the economic foundations of places where manufacturing was the main game in town, such as Martinsville, Va., and High Point, N.C., formerly the self-titled sweatshirt and furniture capitals of the world. Twenty years later, those workers haven’t recovered from those job losses. Although places like these are growing again, most job gains are in low-wage industries. A similar story played out in dozens of labor-intensive industries simultaneously: textiles, toys, sporting goods, electronics, plastics and auto parts.
Yet once China’s Mao-to-manufacturing transition was complete, sometime around 2015, the shock stopped building. Since then, U.S. manufacturing employment has rebounded, growing under President Barack Obama, the first Trump term and President Biden.
So why, you might ask, are we still talking about the China Shock? We wish we weren’t. We published the research in 2013, 2014 and 2016, along with our collaborator David Dorn of the University of Zurich, which detailed for the first time how Chinese import competition was devastating parts of America, through permanent declines in employment and earnings. We are here to argue now that policymakers are spending far too much time looking backward, fighting the last war. They should be spending much more time examining what’s emerging as a new China Shock.
Spoiler alert: This one could be far worse.
China Shock 1.0 was a one-time event. In essence, China figured out how to do what it should have been doing decades earlier. In the United States, that led to unnecessarily painfully job losses. But America was never going to be selling tennis sneakers on Temu or assembling AirPods. China’s manufacturing work force is thought to be well in excess of 100 million, compared with America’s 13 million. It’s bordering on delusional to think the United States can — or should even want to — simultaneously compete with China in semiconductors and tennis sneakers alike.
China Shock 2.0, the one that’s fast approaching, is where China goes from underdog to favorite. Today, it is aggressively contesting the innovative sectors where the United States has long been the unquestioned leader: aviation, A.I., telecommunications, microprocessors, robotics, nuclear and fusion power, quantum computing, biotech and pharma, solar, batteries. Owning these sectors yields dividends: economic spoils from high profits and high-wage jobs; geopolitical heft from shaping the technological frontier; and military prowess from controlling the battlefield. General Motors, Boeing and Intel are American national champions, but they’ve all seen better days and we’re going to miss them if they’re gone. China’s technological vision is already reordering governments and markets in Africa, Latin America, Southeast Asia and increasingly Eastern Europe. Expect this influence to grow as the United States retreats into an isolationist MAGAsphere.
In the 1990s and 2000s, private Chinese businesses, working alongside multinational corporations, turned China into the world’s factory. The new Chinese model is different, with private companies working alongside the Chinese state. China has created an agile, if costly, innovation ecosystem in which local officials such as mayors and governors are rewarded for growth in certain advanced sectors. They had been assessed by total G.D.P. growth, a blunter instrument.
Before it became the site of China’s second-largest producer of electric vehicles, the city of Hefei was the undistinguished capital of a poor hinterland province. By putting up venture funding, taking risks on struggling EV producers and investing in local research and development, Hefei made the leap into the country’s top industrial tier in barely half a decade.
China has performed this miracle many times over. The world’s largest and most innovative producers of EVs (BYD), EV batteries (CATL), drones (DJI) and solar wafers (LONGi) are all Chinese start-ups, none more than 30 years old. They attained commanding technological and price leadership not because President Xi Jinping decreed it, but because they emerged triumphant from the economic Darwinism that is Chinese industrial policy. The rest of the world is ill prepared to compete with these apex predators. When U.S. policymakers deride China’s industrial policy, they are imagining something akin to the lumbering takeoff of Airbus or the lights going out on Solyndra. They should instead be gazing up at the nimble swarms of DJI drones buzzing over Ukraine.
China Shock 1.0 was bound to ebb when China ran out of low-cost labor, as it now has. Its growth is already falling behind Vietnam’s in industries such as clothing and commodity furniture. But unlike the United States, China is not looking back and mourning its lost manufacturing prowess. It is focusing instead on the key technologies of the 21st century. Contrary to a strategy built on cheap labor, China Shock 2.0 will last for as long as China has the resources, patience and discipline to compete fiercely.
And if you doubt China’s capability or determination, the evidence is not on your side. According to the Australian Strategic Policy Institute, an independent think tank funded by the Australian Department of Defense, the United States led China in 60 of 64 frontier technologies, such as A.I. and cryptography, between 2003 and 2007, while China led the United States in just three. In the most recent report, covering 2019 through 2023, the rankings were flipped on their head. China led in 57 of 64 key technologies, and the United States held the lead in only seven.
What has been America’s response? Mostly tariffs: tariffs on everything, everywhere, all at once. This would have been a lackluster strategy for fighting the trade war America lost 20 years ago. On our current trajectory, we might just get those jobs making tennis sneakers. And if we push things further, we could be assembling iPhones in Texas by 2030, a job so tedious and poorly paid that the satirical newspaper The Onion once memed, “Chinese factory workers fear they may never be replaced with machines.”
One thing that tariffs alone will never do is make the United States an attractive place to innovate. Yes, tariffs belong in our trade arsenal — but as precision munitions, not as land mines that maim foes, friends and noncombatants equally.
So what’s the alternative? Before we conducted our China research a decade ago, we believed, as many economists did, that a hands-off trade strategy was better than the messy alternatives. We no longer think that. The United States’ mismanagement of China Shock 1.0 taught us that a better trade strategy is needed. What does better look like? As Einstein supposedly said, everything should be made as simple as possible, but no simpler. In lieu of a too-simple answer, we offer four core principles.
First, policymakers must recognize that most of our difficulties with China are shared by our commercial allies. We should be acting in unison with the European Union, Japan and the many countries with which we have free trade agreements, such as Canada, Mexico and Korea, rather than punishing them with sky-high tariffs for the gall of selling us products we want to buy. Tariffs on electric vehicles would look very different if they were adopted by an expansive coalition of the willing, with the United States in the lead.
Simultaneously, we should encourage China to build battery and auto plants in the United States, just as China enticed leading U.S. companies to set up shop there over the past three decades. Why invite these ruthless competitors onto U.S. soil? Chinese policymakers frequently invoke the “catfish effect,” whereby a strong foreign competitor spurs the weak domestic “sardines” to swim faster or else get eaten. When China’s EV manufacturers were still sardines, Tesla’s Gigafactory Shanghai served as their catfish. Tesla is no longer a catfish in China and is increasingly looking like a nervous sardine.
Does inviting China to manufacture in the United States raise national security concerns? Sure, in some cases. And that’s a reason to mine our own rare earth metals, to ban Huawei networking equipment and to modernize our fleets and ports with ships and cargo cranes supplied by our highly competent Japanese and South Korean allies. But if we close the door on China’s leading industries, we’ll be stuck with homegrown mediocrity.
Second, America should take a page from China by aggressively promoting experimentation in new fields. Choose sectors that are strategically vital (drones, advanced chips, fusion, quantum, biotech) and invest in them. Then do it “China style,” in which the U.S. government operates big venture funds that expect to have a low success rate for any single company or project and a larger success rate in spurring new industries.
This approach worked during World War II (the Office of Scientific Research and Development brought us major developments in jet propulsion, radar and mass-produced penicillin), the race to the moon (NASA engineered getting there and back safely), and Operation Warp Speed (the federal government partnered with big pharma to produce a Covid-19 vaccine faster than essentially any other major disease vaccine had been produced).
These new ecosystems will need supporting infrastructure: reliable and inexpensive energy generation, rare earths, modern shipping and universities with vibrant STEM programs. This will mean pulling back from subsidizing legacy sectors such as coal and oil, restoring federal support for scientific research and welcoming rather than demonizing the talented foreign technicians who would love to help the country advance. At this point, we’d advocate a politically insulated strategic investment capacity in the United States, something like the Federal Reserve, but for innovation rather than interest rates.
Third, choose the battles that we can win (semiconductors) or those we simply cannot afford to lose (rare earths), and make the long-term investments to reach the right outcome. The American political system has the attention span of a squirrel on cocaine. It changes the rewards and penalties so often that little good can happen. Whether or not you thought President Joe Biden’s Inflation Reduction Act was worthwhile, it’s a terrible idea to chop down all those new investments in climate technology three years after they got started, as the recent domestic policy legislation has done. Likewise, summarily terminating the talented CHIPs and Science team, which was chartered to revitalize domestic semiconductor manufacturing, as Mr. Trump has called for Congress to do, won’t advance American leadership in A.I. chips. Both sides of the aisle agree that confronting China is essential for a secure economic future, which offers a semblance of hope that some continuity in our economic policies may be feasible.
Fourth, prevent the devastating impacts of job loss from the next major shock, be it from China or somewhere else (you’ve heard of A.I., right?). The scarring effects of manufacturing-job loss have caused America a heap of economic and political trouble over the past two decades. In the interim, we’ve learned that extended unemployment insurance, wage insurance through the federal Trade Adjustment Assistance program and the right kinds of career and technical education from community colleges can help displaced workers get back on their feet. Yet, we carry out these policies on too small a scale and in too poorly targeted a manner to help much, and we’re moving in the wrong direction. Inexcusably, Congress defunded Trade Adjustment Assistance in 2022.
There is no economic policy that can make job loss painless — especially when it cuts the heart out of your industry or hometown. But when industries collapse, our best response is getting displaced workers into new jobs quickly and making sure the young, small businesses that are responsible for most net U.S. job growth are poised to do their thing. Tariffs, which narrowly protect old-line manufacturing, are terribly suited for this task.
The stakes couldn’t be higher. While gazing in the rearview mirror, we’ve lost sight of the road ahead. Some mile markers on our current route include the ebbing of U.S. technological, economic, geopolitical and military leadership. Managing China Shock 2.0 requires playing to our strengths, not licking our wounds. We must nourish industries that have high potential for innovation, funded by joint investments by the private and public sectors. These industries are in play globally, something China figured out a decade ago. We should stop fighting the last trade war and meet China’s challenge in the current one.
David Autor is an economics professor at the Massachusetts Institute of Technology. Gordon Hanson is an economics professor at Harvard University’s Kennedy School. They are both known for their research into how globalization, and especially the rise of China, reshaped the American labor market.
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