A China Shock or a Multinational Shock?

• In Event: Chinese Politics Mini-Conference: China And The World

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, is not produced
by Chinese homegrown companies but instead by multinational corporations (MNCs) that undertook vertical foreign direct investment (FDI) in China for export purposes. To assess the degree of MNC export activities, we decompose the China shock into two components: (1) a “pure” China shock from Chinese firms (driven by exports from Chinese indigenous companies) and (2) a foreign MNC shock (driven by non-Chinese multinationals that have established subsidiaries in China). We employ a dataset of the universe of over 30 million individual export transactions reported to Chinese customs authorities, 2000 and 2007. This period includes the 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 peaked. We find that MNC activities indeed accounted for a substantial part of Chinese exports to the US. Then, 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. Instead, we develop an “instrumenting outside the value chain” approach to attenuate methodological concerns. Lastly, we find that both components of the China shock – the “pure” China shock and the foreign MNC shock – led to job losses in the U.S. But mainly the foreign MNC activities carried negative political effects by penalizing incumbent vote shares in president elections. Our paper suggests the crucial role of MNC activities in international trade and the understudied political effects channeled through the global value chain.

Authors

• Lizhi Liu, Georgetown University

• Dennis P. Quinn, Georgetown University