China Shock

The China shock (or China trade shock) is the impact of rising Chinese exports on manufacturing employment in the United States and Europe after China's accession to the World Trade Organization in 2001. Studies have estimated that the China trade shock reduced U.S. manufacturing employment by 550,000 (explaining about 16% of the total decline in manufacturing employment in the U.S. between 2000 and 2007), 1.8-2.0 million, and 2.0-2.4 million. Losses in manufacturing employment have also been observed in Norway, Spain, Canada, and Germany. Studies have shown that there was "higher unemployment, lower labor force participation, and reduced wages in local labor markets" in U.S. regions that have industries that competed with Chinese industries.

A 2023 review of existing economic research concluded that US-China trade since the early 2000s caused aggregate welfare gains in both countries; had winners and losers in the US; and was not a leading cause of manufacturing employment decline in the US. However, economists note that the real harm of the China shock was in the rapid economic changes that came with it for communities and workers.

Experts have argued that the China trade shock has ended. In relation to consumer goods, the China shock largely ended by 2006 or 2007 while indicating that for capital goods the effects of Chinese imports to the United States continued up until 2012 and are ongoing in specific product categories. Some politicians have called for protectionism to reverse the China shock, but economists have expressed skepticism that protectionism will bring back manufacturing jobs en masse. Economists have also noted that extreme protectionist measures risks repeating the harms of the China shock by causing rapid economic change for the worse.

In 2025, the ''Financial Times'' reported that China was experiencing its own form of a China shock, as employment in labor-intensive manufacturing was declining, as firms were increasingly opting for automation or shifting their manufacturing to countries with cheaper labor, such as Vietnam and Indonesia.

Background

In 1991, China only accounted for 1% of total imports to the United States. Innovations in communications and transportation technology in the 1990s made it easier for firms to offshore production to low-wage countries such as China. China's accession to the WTO meant that it had to liberalize its economy, and reduce state interference, which boosted the efficiency of Chinese exporters. As China already had "most-favored nation" (MFN) status since the 1980s in Europe and the United States, WTO accession did not lead to lower trade barriers. However, China's MFN status had been subject to annual approval by Congress in the United States; research has suggested that this caused uncertainty, and discouraged China-U.S. trade.

Economists David Autor, David Dorn and Gordon H. Hanson, who have extensively studied U.S. labor markets adjustments to trade competition shocks caused by China, supported the Trans-Pacific Partnership. Autor, Dorn and Hanson argue the adoption of the TPP "would promote trade in knowledge-intensive services in which U.S. companies exert a strong comparative advantage" and pressure China to raise regulatory rules and standards to those of TPP members, while "killing the TPP would do little" to bring manufacturing back to the United States.

Economic impact

Studies have shown that while some markets in the United States suffered adverse welfare and labor impacts, American trade led to net gains in employment and welfare over the period 1991–2011. These claims have been disputed by Economists David Autor, David Dorn and Gordon Hanson, who state that "at the national level, employment has fallen in the US industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize." Although Autor, Dorn, and Hanson have documented the adverse effects of Chinese import competition on certain U.S. regions, they have emphasized that these findings reflect the broader impact of economic disruptions, including technological change and recessions, rather than trade alone. They do not dispute the overall economic benefits of free trade. Instead of advocating protectionist measures like tariffs, the authors argue that policy responses should focus on helping workers adapt to change.

Economist Douglas Irwin nuances the paper of Autor, Dorn and Hanson. According to Irwin the China shock was an exceptional and largely one-off event. It coincided with a large-scale shift of labor from agriculture to industry in China, combined with a growing working-age population. Irwin argues that such conditions are unlikely to be repeated, given the slowing pace of urbanization and the now-declining working-age population in China. Moreover, the rise in Chinese imports occurred during a period of falling unemployment in the U.S., which, according to Irwin, indicates that it was not the result of a general demand shortfall. The problem, he contends, lay more in the geographic concentration of manufacturing and the limited ability of workers to move between regions and sectors.

Irwin also points to other contributing factors behind the deterioration of the U.S. labor market in the 2000s, including the 2008 financial crisis and macroeconomic imbalances such as China's exceptionally high current account surplus. In his view, the China shock does not alter the broad economic consensus that free trade delivers substantial benefits, although it is acknowledged that certain regions or occupational groups can be adversely affected by trade liberalization. In this context, the China shock represents an extreme case. Additional research, including work by Rob Feenstra, highlights the consumer benefits of the China shock, particularly through lower prices that disproportionately benefited low-income households. Part of China's efficiency gains was also due to unilateral reductions in import tariffs on intermediate goods and raw materials, which made Chinese producers more competitive. This development was not the result of U.S. policy, but of internal reforms in China — reforms that Irwin considers positive.

A 2017 study found that Germany gained on net from trade with China and Eastern Europe. A 2023 study found that increased wealth in China as a result of trade liberalization boosted the American higher education sector, as more Chinese families sent their children to study at American universities and pay tuition.

Political impact

Studies have linked the effects of the China shock to an increase in populism and a backlash against globalization. Studies have shown that British regions that were more exposed to Chinese import competition were more likely to vote for Brexit in the 2016 referendum. Exposure to the China shock has led to negative views of minorities, in particular among American whites and males.

Papers have found that the China shock has contributed to political polarization. One analysis also found that it contributed to Donald Trump's victory in the 2016 presidential election: "A counterfactual study of closely contested states suggests that Michigan, Wisconsin, and Pennsylvania would have elected the Democrat instead of the Republican candidate if, ceteris paribus, the growth in Chinese import penetration had been 50 percent lower than the actual growth during the period of analysis. The Democratic candidate would also have obtained a majority in the electoral college in this counterfactual scenario."

In Italy, surges in support for the Lega Nord in the 2010s have been observed in localities where textile mills were undercut by Chinese manufacturers.

Social impact

A 2016 study found that exposure to Chinese import competition led to greater high school graduation rates in the United States. This is possibly because of lower wages and employment opportunities for individuals without high school degrees in regions that competed with China. Economist Samuel Hammond, the director of poverty and welfare policy for the Niskanen Center, has argued that the signing into law of Permanent Normal Trade Relations (PNTR) with China on October 10, 2000, and the subsequent accession of China to the WTO has had wide reaching social implications. He states that the "PNTR has been implicated in some of the most significant and distressing trends of American life in this century: millions of well-paying manufacturing jobs lost; declining family formation and rising deaths of despair; soaring real-estate prices and medieval levels of urban inequality; increased political polarization and populist movements, left and right; and faltering faith in the power of liberal democracy to respond to these and related challenges. To pin all this on a single trade agreement would be a step too far, of course. And yet the imprint of what's come to be known as the "China shock" can be seen on all these trends, either through its first-order effects, or its reverberations through the body politic."

According to two studies, trade-related job losses contribute to greater military enlistment in the United States.

See also

* China and the World Trade Organization

Further reading

* Caliendo, Lorenzo; Parro, Fernando (2023). " Lessons from US–China Trade Relations". ''Annual Review of Economics''. 15 (1)

References

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Foreign trade of China
World Trade Organization