So-Called 'China Shock' Proved a Booster Shot for U.S. Growth
A seminal study by highly-respected economists a few years ago found that the “China Shock” reduced U.S. manufacturing employment by up to 1.5 million jobs between 1990 and 2007. Now, a report last month concludes that American jobs didn’t disappear – they just moved to the services sector and to areas where human capital is very high. In other words, capitalism has been behaving exactly we should want it to – continually re-allocating capital to achieve maximum efficiency.
A fresh study by a team of academics (Nicholas Bloom, Kyle Handley, Andre Kurmann and Phillip Luck) has found in effect that the China Shock is more like the kind employed in heart treatment – it improved the way our system works.
Let’s look at the regional variations, and the change in the nature of jobs. The semi-skilled manufacturing jobs that moved to China actually provided a boost to American employment in high-end areas such as the West Coast and New England – because that is where the new technologies have been developed. Jobs did not simply move from the U.S. heartland to China, they moved from some parts of the United States to others – from the Rust Belt to the Sun Belt. They didn’t just move to China, so much as they moved via China – to Americans better able to meet consumer needs in the 21st century. The end product? Better jobs, at better pay, for higher levels of skills and entrepreneurship – encouraging economic efficiency and growth. The job shift from low-end manufacturing to high-end services is no different than the shift a century or more earlier from low-end agriculture to higher end manufacturing. The economy, and the people who make it up, are much better off for the transition – as their great-grand children will be as a result of the shift in this century. The shift simply demonstrates that how we earn our income depends on how we spend it, and how efficiently we produce.
Anyone who sees only American job losses as resulting from the economic growth of China is only looking at one side of the balance sheet. In regions that employ highly-skilled workers in the industries of the future, such as Silicon Valley, we see growth and more jobs. In regions that try to hang on to the past, such as Ohio’s Mahonning Valley, we see stagnation and fewer jobs. Skills and entrepreneurship are being rewarded; the lack of the same is being penalized – just as they were when the shift from agriculture to manufacturing rewarded those who grasped the opportunities that were being offered. In other words, capitalism is following the same pattern that has lifted us out of the poverty of the past.
The study found a “striking regional variation in the impact of Chinese trade ... largely masked by aggregate employment statistics.” The only way to find out how the engine is really working is to get under the hood. When you do, what do you find? In areas enriched by high levels of human capital, such as the west and east coasts, manufacturing losses are much smaller. Moreover, they are more than compensated for by growth in the service sector. They reflect not a retrenchment, but a shift in the nature of the economy – based on a shift in consumer needs and the technologies available to meet them. The jobs weren’t so much eliminated as their nature was transformed dramatically. Advanced, high-technology firms are still very much in business, spawning largely skill-intensive jobs in research, design, marketing, wholesaling and managing products in the United States even as they transfer plant-level production to China – much as Apple has done. Anyone who tweets angrily about this shifting paradigm using an iPhone is either hypocritical or ignorant.
The study characterizes as “apocryphal” the popular narrative that manufacturing job losses to China were driven by the mass exit of U.S. firms from the United States. In fact, most of the manufacturing job losses occurring at large, high-wage importing firms that simultaneously expanded non-manufacturing employment.
The “China Shock” did indeed give many companies a jolt. But instead of freezing all of them them in place or killing them off, it prompted larger, more productive firms to successfully adopt to import conditions and to new activities made possible by the shift in human and financial capital. Yes, there were economic “losers” in rusted-out towns and rural areas – but they were more than matched by economic “winners” in high-growth regions and sectors of the U.S. national economy. Detroit and Cleveland may have found it hard to cope with the transformation to a services economy, but no more so than rural areas that had to contend with the decline of agricultural jobs and the shift to manufacturing that benefited those Midwest cities a century ago.
The China shock did freeze some American regions in place. But it gave a boost to more, and spawned more jobs, requiring high skills levels and rewarding them with higher compensation. The capital universe is unfolding exactly as it should. Those objecting to it are objecting to progress.