China Shock or Multinational Shock? A Reappraisal of the China Shock in Trade

• In Event: The Mircrofoundations of the US-China Trade War

Abstract

Autor, Dorn, and Hanson’s 2013 and 2016 papers identified a “China shock”: the significant impact of China-originated exports on U.S. labor markets, political polarization, and voting patterns, which in turn has spurred a vast literature in political economy. A substantial part of Chinese exports to the U.S. and other major industrial markets, however, are not produced by Chinese homegrown companies but instead by multinational corporations (MNCs) that undertook vertical foreign direct investment (FDI) in China for export purposes.
We decompose the estimated political effects of the “China shock” into Chinese domestic, U.S. MNCs, and other MNCs exports. We hypothesize that a) the “China shock” is largely a multinational value chain shock and that b) the instrument used in the literature for Chinese imports to the U.S. does not meet the exclusion restriction as the same MNCs exporting to the U.S. are exporting to other industrial nations. To test these hypotheses, we exploit an exhaustive dataset that includes the universe of over 30 million exports reported at the Chinese customs between 2000 and 2007. This period includes export for 23 months before China’s entry into the WTO and the subsequent five years, the period where the “China shock” is often argued to have been at its peak.
We find that MNC activities indeed accounted for a substantial part of Chinese exports to the US. We then disaggregate Chinese exports to the US by firm ownership to examine whether exports by Chinese domestic firms (e.g., SOEs and private firms) generate different political effects than those by MNCs. Lastly, using firm-level data on exports to the U.S. and to other developed economies, we challenge the validity of the identification strategy widely used in the China shock literature.
This paper carries important political implications. If MNCs’ global activities are largely culpable of the negative labor market outcomes in the U.S., this shock would have taken place even without China’s rise, and the shock is likely to persist even if tariffs with China go up.

Authors

• Lizhi Liu, Georgetown University

• Dennis P. Quinn, Georgetown University