David Dorn, a Zurich economist, and his co-authors analyzed the sometimes harmful impact of Chinese imports on labor markets in developed countries. The findings are also significant for climate policy. Because the impacts on employment are rarely highlighted in this argument.
When the first studies were conducted over ten years ago, it was still referred to as China Syndrome. Later, economists David Autor, David Dorn, and Gordon Hanson used the term “China shock” to explain the impact of Chinese imports on local labor markets in the United States. The writers provided the scientific soundtrack for the Trump era through a number of studies. Imports from China have been highlighted as the cause of serious structural change in several areas of America. The study also shed light on the energy transition, which has the potential to cause shocks in structurally deficient areas.
Winner and Loser
It is a cliché that globalization produces winners and losers, and this can be seen in practice. Less specialized workers may lose their jobs or face pay pressure as a result of international competition. For a long time, however, the economic consensus was that trade did not raise intra-country inequality; unfortunately, no empirical evidence could be discovered to support this claim. It was expected that workers would quickly adjust to various trade flows and transition to other industries. The structural change was blamed on new technology in particular.
However, China’s fast emergence as a commercial giant since the 1990s has changed this. The aforementioned group of economists demonstrated for the United States that China’s imports cause labor market upheavals and social difficulties, particularly in locations with a significant share of industrial products exposed to international commerce.
David Dorn, Professor at the University of Zurich, and Peter Levell from the London Institute for Fiscal Studies (IFS) explain in a new study that this relationship applies to all industrialized countries. The study was conducted as part of an IFS initiative on social inequality directed by Nobel Prize winner Angus Deaton.
Dorn does not see the study results as a condemnation of free trade: “The overall welfare has also increased in the USA as a result of trade with China. What is clearly shown, however, are dramatic distributional effects.”
According to the study, the advantages of retail, which are primarily expressed in lower prices for intermediate and end products, are relatively evenly distributed. Regardless of whether they earn well or poorly, no matter where someone lives: everyone benefits to the same extent from the cheaper products due to the Chinese products.
The disadvantages, on the other hand, are concentrated in areas where industries that are exposed to international competition are strong. Employment and average wages fell particularly in regions in the USA whose companies were exposed to Chinese competition and which had slept through structural change.
What was also surprising for the researchers is the reluctance to be mobile, although this is often associated with the USA. The upheavals in the labor market in these areas also led to a higher crime rate, health problems, a breakdown of families and greater support for nationalist-populist parties than elsewhere.
In their new study, Dorn and Levell show that the fundamental problem applies not only to the US but also to other industrialized countries: the more a country imported from China between 1999 and 2007, the more employment in the industrial sector fell. It is also noticeable that in the 1990s and 2000s the increase in imports from China was similarly steep in most industrialized countries.
Switzerland and Germany are doing better
However, exports to China were different: While Switzerland and Germany were able to take advantage of the Chinese rise, this was not the case with goods exports for the US and Great Britain. Dorn suspects that one reason for this can be found in the early presence of Swiss and German companies in China. In addition, both countries also export capital goods that were necessary for the development of the Chinese economy. The China shock is less pronounced in these two countries.
It is also astonishing how stubbornly the structural weaknesses weigh on the affected American regions. Globalization took a leap, especially in the 1990s and 200s. This is mainly due to China. In the past ten years, however, world trade has moved sideways. From 2012 onwards, the China effect weakened considerably, says David Dorn.
Most of the consequences have remained, however. The protectionist policies of the former American President Donald Trump had rather negative consequences for employment.
The future of the coal regions
This knowledge could also be important for another big topic: climate policy. “When it comes to the energy transition, the question arises as to how this will be ushered in. Amazingly, there is relatively little discussion about the consequences of employment,” says Dorn.
For example, areas in which coal is mined or which are otherwise heavily geared towards fossil fuels are at risk. Because the use of renewable energies is heavily dependent on geographical conditions, employees cannot simply switch to the “old” energies.
Old coal regions in North America and Western Europe are often still economically weak regions, even if the phase-out of coal began a long time ago. This can lead to further inequality. The exit from fossil fuels was mentioned for the first time in the final declaration of the Glasgow Climate Conference. At the last few meters of the negotiation, a passage was introduced that this should be done “fairly”. Developing countries hope that this will provide them with financial support.
But what does successful regional policy look like? For Dorn there is no one-size-fits-all solution, rather a multitude of programs: The population in economically weak regions should receive financial support in order to avoid social hardship. Further education and training are also important so that people can better adapt to the structural change on an individual basis. Business subsidies are also possible.
Image Credit: Getty
You were reading: What the China shock has in common with global energy transition