From the late 1990s through the early 2000s, China saw a boom in economic growth as it moved away from central planning to a market economy. In 2001, it joined the World Trade Organization and rapidly integrated into the global trade system. With a new, large supply of inexpensive goods from China available to the world, manufacturing in the United States struggled. Nearly a quarter of the country’s manufacturing jobs disappeared between 1999 and 2007, and American towns that had been centers for manufacturing stagnated.
The scale of the trade shock in American communities was illuminated by research by the economist Gordon Hanson—the Peter Wertheim Professor in Urban Policy and HKS academic dean for strategy and engagement—and his coauthors David Autor PhD 1999 and David Dorn. They studied the phenomenon, popularizing the term “China Shock” in their influential research, which published in 2013, 2014, and 2016.
Hanson and his coauthors found that the impact on American industrial towns was far from uniform: some communities were able to respond better than others, and some workers managed to reskill or relocate, while others could not. They wrote that the effects of the shock did not wither away even long after the peak of Chinese imports, despite expectations to the contrary, and with considerable political consequences.
China Shock 2.0
The status of trade relationships between the United States and China remains as relevant today as it did when Hanson and his colleagues conducted their original China Shock research.
This year, Hanson and Autor revisited the state of economic competitiveness between the two countries. In a New York Times guest essay in July, they wrote, “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, AI, telecommunications, microprocessors, robotics, nuclear and fusion power, quantum computing, biotech and pharma, solar, batteries.”
America’s response to this new China Shock, Hanson and Autor argue in the New York Times, would benefit from following four core principles: One, act in unison with other countries with which the United States has free trade agreements and invite China to build plants in the United States. Two, invest in strategically important new fields, such as new technologies. Three, “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.” And, four, protect against the damage from job loss due to economic shocks. While analysis and understanding of China Shock 2.0 is ongoing, these insights will be critical in addressing the challenges that the United States faces.
Helping local economies grow
Hanson’s work on the China Shock has been influential in challenging a dominant economic view of trade as a net positive, even if it causes local disruptions. His work has revived interest in labor market geography and place-based economic effects, which Hanson continues to study through the Reimagining the Economy project, an initiative he leads with Dani Rodrik, the Ford Foundation Professor of International Political Economy.
The Reimagining the Economy project is reframing the narrative around economic inclusion in the United States. A major thrust of the project has been involving practitioners and policymakers in the work, through events and workshops. It also runs a Practitioners in Residence program. Last semester, these practitioners were Daniel Goetzel, who helped design and implement programs deploying $3 billion into regional innovation ecosystems in the United States, and Vishnu Venugopalan, a former Indian Administrative Service officer, who brings expertise in industrial policy, investment promotion, and green energy development from his experience in Tamil Nadu, India.
The project has convened economic development practitioners—especially from distressed or rural regions—to better understand the barriers they face in accessing federal and state funding. A gathering that the project held at the Kennedy School in April, for example, brought together participants from Alabama, Arkansas, central California, the Cheyenne River Sioux Reservation, Georgia, Kentucky, Maine, Ohio, Oklahoma, Oregon, Pennsylvania, South Dakota, Washington, West Virginia, and western New York. Through workshops and discussions, the participants examined the economic challenges that their regions face—and discussed how to address them.
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Banner image: An employee works at an aluminum products factory in China. Photo by Li Xin/VCG/Getty Images; faculty portraits by Martha Stewart