【Text by David Autor, Gordon Hanson, Translation by Guo Han, Observer Net】
Between 1999 and 2007, China first had a "disruptive impact" on the U.S. economy, leading to the loss of nearly a quarter of manufacturing jobs in the country. This later came to be known as the (first) "China Shock," which originated from China's rapid transition from a planned economy to a market economy since the late 1970s.
During this period, a large number of laborers and capital flowed from rural collective land into joint-venture factories in cities. Cheap Chinese goods flooded in, destroying American towns that relied on manufacturing, such as Martinsville in Virginia and High Point in North Carolina, which had previously boasted of being the "global capital of athletic wear and furniture."
Twenty years later, local workers still haven't recovered from the shock of losing manufacturing jobs. Although some areas have seen growth again, most of the new jobs are in low-paying industries. The same story is playing out across many labor-intensive sectors — such as textiles, toys, sporting goods, electronics, plastics, and auto parts.
However, once China's economic transformation was completed around 2015, the momentum of its impact no longer accumulated. From then on, U.S. manufacturing employment began to recover — continuing to grow during Obama's presidency, Trump's first term, and Biden's administration.
So, you might ask, why do we still talk about the "China Shock"? We also hope not to talk about it anymore. In 2013, 2014, and 2016, we co-authored a series of studies with our collaborator at the University of Zurich, David Dorn, for the first time systematically presenting how competition from Chinese imports caused long-term, structural job and income losses in certain parts of the United States. Now, we want to emphasize: U.S. policymakers spend too much time dwelling on the past, preparing to fight the "last trade war." They should instead carefully study the emerging "China Shock 2.0."
Spoiler alert: This time, the impact on the United States may be even more severe.
"China Shock 1.0" was a one-time event: essentially, China simply caught up with development steps it should have taken decades ago. The United States paid an unnecessary and painful price for job losses, but ultimately, the U.S. is not a country that makes money selling tennis shoes on Temu or assembling AirPods. China's manufacturing labor force is believed to exceed 100 million, while the U.S. has only 13 million. If the U.S. still fantasizes about being able to compete with China in both semiconductors and tennis shoe manufacturing, it would be too unrealistic.
The rapidly approaching "China Shock 2.0" is the opportunity for China to shift from an underdog to a focal point of attention. Today, China is rapidly challenging the innovation leadership that the U.S. has long considered unshakable: in fields like aviation, artificial intelligence, telecommunications, chips, robotics, nuclear energy and fusion energy, quantum computing, biomedicine, solar energy, and batteries. Leading these industries brings various returns: high-profit enterprises, economic benefits from high-paying jobs; geopolitical influence through shaping the forefront of technological development; military strength from high-tech dominance on modern battlefields. Companies like General Motors, Boeing, and Intel were once sources of American pride, but they are no longer. If their industry leadership disappears, Americans will regret it deeply.
Solar facilities in Shanxi Province, China and oil facilities in California, USA, New York Times
Today, China's vision for technological development is reshaping the government and market landscapes of Africa, Latin America, Southeast Asia, and even Eastern Europe. As the U.S. gradually slides into "Make America Great Again"-style isolationism, China's influence is expected to further increase.
In the 1990s and early 2000s, Chinese private enterprises and multinational companies together transformed China into the "world factory." But the new Chinese model is different: private enterprises are now working alongside the government. China has built a flexible (perhaps expensive) innovation ecosystem, where local officials are no longer measured solely by the growth of GDP, but are encouraged to develop specific frontier industries.
For example, Hefei, once just an obscure provincial capital in a poor inland province, has now become the second-largest electric vehicle production base in China. This transformation was achieved through local government funding of venture capital, supporting struggling electric vehicle companies, and heavy investment in local R&D capabilities. Hefei became one of the top manufacturers in the country within five years.
Such miracles have already happened multiple times in China. The world's largest and most innovative electric vehicle (BYD), battery (CATL), drone (DJI), and photovoltaic silicon wafer (LONGi) manufacturers are all emerging companies established less than 30 years ago. Their leadership in technology and price was not due to government orders, but rather due to fierce market competition under industrial policy guidance. No other countries are prepared to deal with these top-tier "business predators." When U.S. policymakers mock China's industrial policies, they imagine something like a wobbly Airbus or Solyndra solar panels that suddenly go dark. In fact, they should think of DJI drones moving flexibly on the battlefield in Ukraine.
When China's cheap labor dividend faded, "China Shock 1.0" was destined to recede, as seen today. Vietnam is now growing faster in the clothing and furniture industries than China. However, unlike the U.S., China does not intend to look back and mourn the loss of its manufacturing presence. China is focusing on key technologies of the 21st century. "China Shock 2.0" is no longer a strategy based on cheap labor. As long as China has the resources, patience, and discipline to face intense competition, this shock will continue.
If you doubt China's strength or determination, data won't be on your side. According to the Australian Strategic Policy Institute (a independent think tank funded by the Australian Department of Defense), between 2003 and 2007, the U.S. led China in 60 out of 64 frontier technologies (such as artificial intelligence and cryptography), while China only led in 3. However, according to the latest report, between 2019 and 2023, China overtook the U.S. in 57 out of 64 technologies, while the U.S. led in only 7.
What has been the U.S. response so far? Basically, it's tariffs. A blanket tax on all goods and all countries. This strategy is already difficult to use for a trade war that was lost 20 years ago. Going down this path, the U.S. might really "regain" the tennis shoe manufacturing industry — if they work hard, maybe even bring iPhone assembly lines back to Texas by 2030, letting Americans do those dull, low-paying jobs that even Chinese workers would prefer to be replaced by robots (as "The Onion" joked).
But tariffs can never make the U.S. a hotbed of innovation again. Yes, tariffs are part of the U.S. trade policy toolkit, but they should be used like precision-guided weapons, not like landmines that indiscriminately harm both friend and foe.
What should the U.S. do? Before conducting this research on China ten years ago, like many economists, we believed that a non-interventionist trade strategy was better than any bad alternative. We no longer believe this view. The wrong handling of "China Shock 1.0" has taught us that we need a better trade strategy. What should it look like? It is said that Einstein once said that everything should be made as simple as possible, but not simpler. To avoid overly simplified answers, we summarize four core principles.
Ford Battery Plant in Marshall, Michigan
First, U.S. policymakers must acknowledge that the majority of issues between the U.S. and China are shared by our commercial allies.
The U.S. should act jointly with the EU, Japan, and many free trade agreement partners, such as Canada, Mexico, and South Korea, instead of punishing them with high tariffs for exporting products the U.S. wants to buy. If it were a voluntary coalition of countries led by the U.S., collectively imposing tariffs on electric vehicles, the effect would be very different.
At the same time, we should encourage Chinese companies to invest in building battery and electric vehicle factories in the U.S., just as Chinese companies have attracted well-known American companies to set up factories in China over the past three decades. Why should we invite these ruthless competitors to come to American soil? Chinese decision-makers often talk about the "catfish effect," which means that a strong foreign competitor stimulates weak domestic companies to swim faster, otherwise they will be eaten. When Chinese electric vehicle companies were "sardines," Tesla's Shanghai Super Factory played the role of the "catfish." Now, Tesla is no longer the "catfish" in the Chinese market, but increasingly resembles a nervous "sardine."
Inviting Chinese companies to produce in the U.S. could raise national security concerns? Of course, in some cases it would. That's why the U.S. needs to focus on its own rare earth supply, ban Huawei's network equipment, modernize our merchant fleet and ports (relying on technologically strong allies like Japan and South Korea for merchant ships and cranes). However, if the U.S. keeps its leading industries out, we can only rely on uncompetitive domestic companies working in isolation.
Second, the U.S. should replicate China's experience and actively cultivate a "spirit of experimentation" for new industries.
For example, select a few key strategic industries (drones, advanced chips, fusion energy, quantum technology, biotechnology), and "invest as China does," i.e., large-scale venture capital funds led by the U.S. government. It is expected that these investments will have a low success rate when promoting the development of individual companies or projects, but a higher success rate in stimulating the healthy development of entire new industries.
This approach worked during World War II (e.g., the Office of Scientific Research and Development's outstanding contributions in developing jet fighters, radar, and mass-producing penicillin), during the space race (NASA's guidance for manned moon landing and return), and during the "Operation Warp Speed" (the federal government's collaboration with major pharmaceutical companies to develop the coronavirus vaccine at a speed that basically exceeded that of any major vaccine developed before).
This emerging industrial ecosystem also requires supporting infrastructure: reliable and affordable energy supply, rare earth supply, modern port transportation facilities, and vibrant university science and engineering departments. This means the U.S. needs to stop subsidizing outdated industries like coal and oil, restore federal research funding, welcome and not demonize excellent science and technology talents from around the world who are willing to help the U.S. achieve progress. Today, we even advocate for establishing a strategic investment department in the U.S. that is free from partisan politics, similar to the Federal Reserve, but managing not interest rates, but scientific innovation.
April 2, Trump signed the so-called "reciprocal tariffs" executive order, screenshot of the tweet
Third, choose the battlefield where the U.S. can win (such as semiconductors) or the battlefield where it cannot afford to lose (such as rare earths), and ensure appropriate output through long-term investment.
The U.S. political system's concentration level is equivalent to that of a drug-addicted squirrel. They change their policies so frequently in reward and punishment that it almost never leads to good results. Regardless of how you view the Inflation Reduction Act passed by the Biden administration, cutting this newly launched three-year act recently is extremely detrimental to new energy investments. Similarly, the Trump administration's call for Congress to significantly repeal the chip and science committee established under the Chips Act, which aims to revive the U.S. semiconductor industry, is also detrimental to maintaining the U.S. leadership in artificial intelligence. Both parties in Congress agree that countering China is crucial for ensuring the economic security of the U.S. in the future, and this consensus seems to offer a glimmer of hope: our economic policy may maintain some continuity.
Fourth, the U.S. must avoid the next major economic shock causing devastating damage to domestic employment, whether it comes from China or elsewhere (you heard the word "artificial intelligence," right?).
Over the past two decades, the pain caused by the loss of manufacturing jobs has brought significant trouble to the U.S. economy and politics. At the same time, we have learned that expanding unemployment insurance and wage insurance through the federal Trade Adjustment Assistance program, combined with community colleges providing appropriate vocational and skills training programs, can help laid-off workers regain their footing. However, for a long time, the investment in these policies has been insufficient, targeted poorly, and the U.S. has been heading in the wrong direction. It is unacceptable that Congress terminated funding for the Trade Adjustment Assistance program in 2022.
No economic policy can make job losses "painless" — especially when unemployment severely hits a nation's core industries and towns. However, the most effective response when an industry collapses is to help those unemployed workers find new jobs as quickly as possible and support small, new businesses that can create net new jobs. Tariffs can only protect "sunset industries" like outdated manufacturing and cannot achieve this.
This is a critical issue. While staring into the rearview mirror, we have neglected the road ahead. The mileage markers on the road ahead show that the U.S.'s technological, economic, geopolitical, and military leadership is gradually declining. Dealing with "China Shock 2.0" means focusing on U.S. strengths rather than licking wounds. The U.S. must focus on industries with great innovation potential driven by public-private collaboration. This is a global competition, and China realized this ten years ago. We shouldn't be busy fighting the last trade war, but instead focus on the current Chinese challenge.
(The original article was published in the opinion section of the New York Times website, titled “We Warned About the First China Shock, the Second Will Be Worse.” The translation has been edited and is for reference only, and does not represent the views of Observer Net.)
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