Testing the “China Shock”: Was normalizing trade with China a mistake?

The Cato Institute today released a policy analysis by senior fellow Scott Lincicome, which assesses recent arguments against the normalization of U.S. trade relations with China in the 1990s and early 2000s, including that it fueled China’s rise, drove the “China Shock,” and justifies a radical rethink of U.S. economic and foreign policy today.

The “China Shock” refers to the period between 1999-2011 during which a sizeable increase in Chinese imports into the U.S. supposedly destroyed approximately 2.4 million jobs. Lincicome notes that, while critics often claim that the 2000 U.S. “permanent normal trade relations” (PNTR) law and China’s entry into the World Trade Organization (WTO) in 2001 were naïve mistakes that fueled China’s rise and drove the shock, “[e]ngagement and liberalization, exemplified by PNTR and China’s WTO accession, were a pragmatic and bipartisan policy choice made in the face of nonexistent or inferior alternatives, especially given the information when the choice was made.” In fact, the ample historical records cited in Lincicome’s analysis show that Washington policymakers did not first open the U.S. market to China via PNTR; rubber-stamp China’s WTO accession due to idealistic dreams of Chinese liberalization or democratization; or have any realistic way to block China’s economic growth and global integration in the late 1990s.
He also cites numerous studies released since the original China Shock papers, as well as extensive economic data and contemporaneous accounts, to show the shock to be less disastrous and more complicated than anti-engagement critics claim. For example, beyond the clear consumer benefits, Lincicome finds the U.S. manufacturing job losses during the China Shock period to be those of ‘late stage’ industries that were exiting the United States regardless and notes that the alternative to Chinese imports would likely have been other imports, not expanded U.S. production. He also points to evidence showing that many U.S. manufacturers adapted to the shock, resulting in the hiring of many Americans and an increase in output. Though certain workers and regions did face difficulties, Lincicome shows that these problems were caused by an indecipherable mix of nontrade factors and import competition that would be present regardless of PNTR.
Lincicome also details the government interventions and protectionist policies during the China Shock period that tried – but repeatedly failed – to aid affected U.S. companies and workers, “These policies refute the claim that U.S. policymakers simply passed PNTR and walked away from the American working class out of some sort of ‘market fundamentalism’ or rigid adherence to ‘laissez faire ideology.’ The real problem was that these interventions did not work very well.” He goes on to note the many U.S. policy failures that have occurred since China’s WTO accession, while also highlighting the overlooked benefits that have come with increased trade liberalization.
As Lincicome concludes, “commentators and politicians who blame China trade for the difficulties of the American working class should stop asking, ‘Why did elites normalize trade with China in the 1990s?’ and instead ask, ‘What did many American towns, companies, and workers do right in the face of the intense import competition, how can local, state, and federal policies encourage that important improvement?’” Failure to ask these questions, or to recognize legitimate policy mistakes that have enabled China’s rise or hobbled American companies and workers, “could lead to truly bad governance: increasing U.S. protectionism; forgiving the real and important failures of our policymakers, CEOs, and unions over the past two decades; and preventing a political consensus for real policy solutions.”