Reassessing the China Shock: How Import Competition Paved the Way for Populism

• In Event: Improving Trade Theory: Innovations in Measurement and Empirical Strategy

Abstract

Since the circulation of David Autor, David Dorn, and Gordon Hanson’s working paper on the “China Shock” in 2011, there has been a cottage industry of academic papers claiming to estimate causal relationships between increased import competition from China and a host of economic, social, and political outcomes in the United States. However, recent concerns with the China Shock instrument have called into question the causal interpretation of these relationships. In this paper, I propose a new measure of the China shock that combines the labor market intuition of Autor, Dorn and Hanson’s original instrument with the exogenous shock of Chinese accession to the WTO highlighted by Pierce and Schott (2012). I apply a generalized difference-in-differences method known as trajectory balancing to match counties that are relatively exposed to Chinese import penetration with those that are relatively insulated based on their pre-accession outcomes. This method, combined with the new measure of exposure, overcomes many of the existing methodological concerns with the “China Shock” instrument. I re-examine a range of published findings using this method and confirm and dis-confirm several existing results. Furthermore, I am able to trace the economic, social, and political responses over time, providing novel insights into the dynamics by which import competition erodes local communities. Specifically, I show that the initial response to increased import competition was not via labor mobility as theorized by traditional economic models, but rather through increasing reliance on the state. As these resources depleted, exacerbated by 2008’s financial crisis, I document increasing evidence of social decay in the form of crime, substance abuse, and mortality. These social outcomes are, in turn, the precedents for the political disenchantment that paved the way for Trump’s election in 2016.

Author

• James Hodgdon Bisbee, NYU