The China Shock and the Trump Shock

Yes, it’s Christmas Day. Bah Humbug. Also, the family won’t get here for a few hours, and I wanted to put something out as background for tomorrow’s column.

So, I’m thinking about the Trump trade war, which is looking increasingly likely — especially because U.S. trade law gives the White House remarkable leeway to go protectionist without legislative action. That wasn’t the law’s intent; but do you think this guy will care?

What happens if the protectionist-in-chief goes ahead and does it, as I suspect he will?

Claims that there would be huge net job losses are extremely dubious. But what would happen would be a global trade war, which would disrupt the existing economic structure, which is built on elaborate international supply chains.

In the long run, a new structure with shorter chains would be built. But in the meantime, some industries, some factories, would end up becoming sudden losers — in the US as well as in developing countries.

The lesson I took from the widely cited Autor, Dorn, and Hanson paper on the China shock was that Ricardo and Heckscher-Ohlin were less relevant to the political economy of trade than the sheer pace of change, which disrupted local manufacturing concentrations and the communities they supported. The point is that a protectionist turn, reversing the trade growth that has already happened, would be the same kind of shock given where we are now. It’s like the old joke about the motorist who runs over a pedestrian, then tries to undo the damage by backing up — and runs over the victim a second time.

That is, I’d argue, the way to think about the coming Trump shock. You can’t really turn the clock back a quarter-century; but even trying can produce exactly the kind of rapid, disruptive shifts in production that fed blue-collar anger going into this election.

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About Uy Do

Banking System Analyst, former NTT data Global Marketing Dept Senior Analyst, Banking System Risk Specialist, HR Specialist
This entry was posted in economists, Uncategorized, US economic, US economy and tagged . Bookmark the permalink.

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