Planet Money - Why economists got free trade with China so wrong

Episode Date: December 30, 2025

With the year coming to a close, we're sharing our most popular Planet Money bonus episode of 2025! As U.S. trade with China exploded in the early 2000's, American manufacturing began to shrivel. Those workers struggled to adapt and find new jobs. It ran counter to how mainstream economics at the time viewed free trade ... that it would be a clear win for the U.S. Greg Rosalsky talks with David Autor about why economists got free trade with China so wrong.  Autor, an MIT economics professor, and his colleagues published a series of eye-opening studies over the last 15 years or so that brought to light the costs of U.S. trade with China. We also hear Autor's thoughts on the role of tariffs and get an update on his research. With better, more precise data, Autor says we have a more nuanced and "bleaker" picture of what happened to these manufacturing workers. You can read about Autor's research and sign up for The Planet Money Newsletter here. To hear more bonus content like this and support NPR and public media, sign up for Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney. Regular episodes remain free to listen!Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

Hey, Greg Rosalski here. Today, we're sharing our most popular bonus episode of 2025. It's my conversation with economist David Otter from the beginning of this year. It's about the cost of free trade. If you're new to NPR Plus, we wanted to make sure you didn't miss this one. If you've already heard it, don't worry, we'll be back with a fresh bonus episode for you in two weeks. And if you're not signed up for Plus, but want more bonus content like this, go to plus.npr.org. So for decades, the mainstream thinking in economics was that free trade would be a clear

win for the United States. Sure, the reasoning went some workers might lose jobs, but the thinking was they'd get new ones as the economy changed and grew and everything would basically be fine. Everything turned out not to be fine. No research project has made that more clear than one spearheaded by MIT economist David Otter and his colleagues. The story that has been told about the consequences of trade is so far from the reality of how people live, that it's just, you know, it's all gains, everyone's better off, there's no real cost. I mean, in theory, there could be, but in practice, there's not.

But that's just not the lived experience of anyone, and that's not what the data ultimately showed. Over the last 15 years or so, Otter, along with economist David Dorn and Gordon Hanson, have published a series of eye-opening studies on something known as the China Shock. The shock refers to what happened to the United States after Chinese imports came flooding into the country starting around 2001. What the economists found was devastating. Well over a million manufacturing jobs destroyed, these job losses were hyper-concentrated in communities around America. The China shock basically created miniature depressions in these communities, and former manufacturing workers struggled to adapt and get new jobs. Economic research and research in all other social sciences says job loss is extremely costly. Mortality goes up, depression goes up next to, you know, going through a divorce, or, you know, it's really way up there in the degree of psychic damage.

Of course, people can lose jobs and so on, but we shouldn't pretend that this is inconsequential. Water, Dorn, and Hanson recently joined with economist Maggie Jones and Bradley Setzler to revisit their influential China Shock research. This time, they have even better, more precise data. And with the greater passage of time, they're able to look and see what happened to American communities hit by the China shock over a longer time frame. Their analysis goes through 2019, the eve of the COVID-19 pandemic. In this new paper, they're able to disentangle the effects on people

and the effects on places. It paints an even more nuanced and, as David describes it, bleaker picture of what happened to the manifest workers directly hit by the China shock. The paper also shows how a different set of workers in these communities, like immigrants and young folks with college degrees, found jobs in new sectors that grew out of the ashes of manufacturing. So I interviewed Otter earlier this year for the Planet Money newsletter.

We'll link to it in the episode notes. It was a really wide-ranging and deep conversation about the China shock, economics, and the role of tariffs. Some of the stuff we talked about didn't make it. into the newsletter. But we're happy to be able to share it with you now in this bonus episode. Okay, here it is my conversation with MIT economics professor, David Otter. The first sentence of your paper is regionally concentrated job loss is a major economic challenge of our time. So first, can you just kind of, for a lay audience, just explain that.

Like, why is that a major economic challenge that this regionally concentrated job loss? Well, sure. So, you know, we do not have. have high unemployment to the United States and haven't had for a long time, but we have had declining labor force participation of less educated workers, and that has been strongly tied associated with the decline of blue-collar work. And a lot of the non-working adults are men without college degrees, many of them who might have been in kind of production work, not exclusively, but in blue-collar work some time ago. And it is absolutely the case that the places where manufacturing has declined the most, that's where we've seen the largest increases

in joblessness among prime age adult men. And then the China trade shock provided a very focal event for seeing that because its impact were so regional. Why are they so regional? Because, you know, although Chinese goods are sold in, you know, Walmarts all over America, the places that would have made those goods had they not come from China were very localized, right? So you have like the furniture capital, the sweatshirt capital of the United States, and, you know, industry is very localized. Manufacturing is, first of all, you know, hospitals and drugstores and grocery stores, you find them in every county. Manufacturing is much more concentrated. You have, you know, you have the place in the upper and west, you have a place of parts of the south, you have parts of the west coast,

but it's not evenly dispersed in any sense. And then even more than that, where it occurs, it's very specialized, right? A place that does autos, you have a place that does tools, you have a place that does assembly, you have a place that, you know, historically does socks and textiles and various ways. So when competition from China accelerated dramatically with China's accession to the World Trade Organization 2001 and the incredible search of imports, that really made non-competitive a lot of labor-intensive, not particularly high-tech U.S. manufacturing. So toys, textiles, you know, commodity furniture, like you would, you know, see at a target or Walmart. And so it made those sectors just kind of non-viable almost overnight.

And because those sectors were so concentrated, it made the areas in which they were located, it was just like a, you know, a kind of a bomb being dropped over downtown. And I'd imagine that there's ripple effects, obviously, of that. So that's just the manufacturing. And then, like, those people were going to their local store and buying this and that. And so there were ripple effects of that as well in these local communities. We don't see huge employment effects outside manufacturing, but you do see a change in the income structure and a decline in the number of high-wage jobs, and especially high-wage jobs

for workers that college degrees. Manufacturing is historically a pretty high-wage, low-education sector. Just a quick side question. I never hear about the NAFTA shock. Why is that? Is that just because the shock wasn't as good, or is the shock wasn't as big, or what? No, it's because people didn't know how to measure it. In fact, there is now a literature that kind of re-exams the NAFTA trade shock, sort of using the same

toolkit that we used for the China trade shock and actually documents pretty large employment effects and large political effects. So in fact, you know, there's this lore among economists that, oh, we never really thought it had big distribution effects and the China shock was the one that really broke us up to this. But it turns out we weren't doing a good job of measuring them when they're present. And therefore, we weren't learning about them even when they were happening. And so NAFTA actually was a bigger deal than it was understood not only to be at the time,

but understood by economists for a couple decades subsequently. Well, one quick thing. So there was this bipartisan consensus, obviously, for a long time on free trade. But like the time travel, I was in high school at the time. I remember the 1999 Seattle protests. And I've looked back in labor unions were certainly saying this is going to be bad for American workers. People like Bernie Sanders were saying it. Trump is saying it. And yet, as far as I can tell, most economists and policymakers assume that, you know, China joining the World Trade Organization would wouldn't be that bad. There would be obviously some losers. but we'll adjust and everything will be fine.

Can you just sort of take us, like, from the mainstream economic perspective on this? Because, like, were they just not listening to people? Do they think you're just wrong? Like, where is this, like, we didn't see it coming? Because it seemed like some people did see it coming. Yeah. So as economists, we are, you know, taught the kind of theory of comparative advantage. And it says, look, you know, free trade among consenting nations raises, you know, GDP, raises

economic output in all of them. Now, a caveat to that point is it doesn't make every person in those countries better off. In fact, it will in general make some people worse off. So basically it grows the pie, but it really is expected to shrink some slices in absolute terms, right? And the reason is why is that true? Because trade works by changing prices, and the prices of goods are directly tied to the skills used to produce them. And so if you have a lot of skills in making furniture and the price of furniture fall in half, well, you know, your skills or your specialized skills are not going to be worth as much. And so economists have understood this, you know, really for centuries and in very formal terms since the 1950s, the Rubchinsky theorem, the Stolper-Samun

theorem, they really prove that actually it'll grow the pie but make some slices smaller. So why weren't economists more concerned about this? Well, first of all, historically, a lot of the trade in the, you know, the 20th century in the post-war era was trade among rich countries. And so it was more like, you know, we sell, you know, some jet engines to France. They sell us some champagne and, you know, we kind of all just focus on a comparative advantage. It's really not about price competition. It's around, you know, trading specialized goods in which, you know, of course, it's great. We're both better off to make that trade.

That's one reason. And so we weren't kind of used to major trade expansions with, you know, much lower income countries. It doesn't mean we can't benefit from that, but it's going to have different consequences. The other is the absence of evidence of adverse effects. and the absence was taken as evidence of absence, that there were no effects. But it turns out the research methods

that were used to analyze that were just not really asking the right questions. This is since they were asking questions about prices because trade works through prices, they weren't asking questions about employment. In many economic models, employment is assumed to be 100%. Everyone who wants to work can work. And so, you know, the only effects you expect to see

in that case would be changes in wages. But in fact, what we see is a lot of, that occurs through changes in employment rates, not through changes in wages. So Dorn and Hanson and I have been working on this for more than a decade. Our first paper on this, the so-called China Syndrome paper, took a different... I know there was a working paper, and then it was officially published. It was a working paper in 2011. It was published in 2013, so Lightning Fast for Economics. And it basically said, instead of looking at the aggregate economy and wages and prices,

let's look at regional labor markets, you know, commuting zones, clusters of counties, where people live and work, of which there are 722 commuting zones by how we define them. And let's look at the ones that are more exposed to Chinese imports and the ones that are less exposed. And what we mean by more exposed is they were previously making the things in which China gained big market share. And what we mean is by market share is all countries started importing these goods from China, right? So we don't just look at imports of sneakers to the US. We look at them in, you know, Australia and Japan and France and Germany. And we look at the common component and say, well, if everyone is all of a sudden switching to Chinese sneakers or Chinese furniture or Chinese

tools or Chinese clothing, it must be because they're, you know, they're becoming much more productive or facing lower trade barriers, right? It's not because the U.S. is suddenly making the badly. It's just because China's gotten really good. And then we say, let's look at the geography, what places would therefore be facing reduced demand? And there you can see immediately. It's incredibly first order evident, actually, that first of all, manufacturing employment goes down. You would expect that. It would have to be true. We're not buying, we're importing stuff. We're not making it. So, of course, manufacturing employment goes down in those areas. And then the open question is, well, what happens? Do people just find another equally good job?

Does another manufacturing sector grow up, et cetera? And what we found is a rise in unemployment, a non-participation, an increase in usage of social transfer benefits. Some of them well-targeted, like unemployment insurance and trade adjustment, but a lot of them having Medicare, Medicaid, disability. And so the main risk. result was the adjustment process was wrenching and slow and scarring. It was not like the blackboard model of labor market where you lose one job and you get another almost equally good job in another firm. In other words, the model was like, I think if you've used this term before, it assumed there would be sort of like the seamless, frictionless shifting and reallocation across

the economy. You'd be like, oh, I lost a manufacturing job, but you know what? In this new economy, I could work at X place and, you know, there might be some pain in the short run, but, you know, there's payments and like these places will adjust. Sure. Look, look, a million jobs, right? We're a labor market of 150 million people. Like, how much could that matter, right? That's like less than 1%.

You know, the tide goes in and out every day. So you know, water goes out. Why does it matter? But, of course, it's not a million jobs evenly spread across the country, right? It was very concentrated in the South Atlantic, the deep south, parts of Texas. and then a little bit on the West Coast. And it was really concentrated. These were often, these industries were kind of the economic foundation of a given community.

So to go to this new paper, so you're disentangling the effect on place versus the effect on people. And just so I have it, why do we care about that distinction? Because I think most of the time people think, oh, an American community gets hurt. Why disentangle the place versus the people? Well, I think they're both valid perspectives, right? So obviously, it's not hard to make the case for the people, right? Well, these are people who are there, they were affected, right? And it might legitimately feel like, wow, this really didn't work out well for us.

We're pretty upset about it. And then there's like, well, how's the city of Boston doing? How's, you know, how's Cambridge? How's Los Angeles? You know, how's Duluth, et cetera. And so if you looked at it from the perspective of the place, you get a quite different answer because they have in many ways bounce back. And you could even point to say, look, unemployment is low.

There's lots of new businesses. There's young people coming in. It's more diverse, you know, et cetera. What are you even worried about? Well, you know, if you were the person who was in manufacturing at that time, you understand very well what happened and how it still feels. You actually, turns out those people, you might think they all would have packed up and headed for a higher ground, but in fact, they became less likely to move out, possibly

because they were, you know, in dire strait, so it was hard to get the resources, possibly because they didn't see better opportunities available to them. The many of the places they might have gone were similarly affected. And so there was no real reason to leave. Correct me if I'm wrong. So, like, basically free trade with China, like led to de-industrialization in a bunch of different communities. And then this paper is saying, like, you know, actually there was, in fact, recovery

afterwards, but the jobs tended to be crappier. And even if they're not in industry, you know, retail, low-end medical services, you know, warehousing, big box stores, food services, some education. probably mostly public education. So they re-grew employment. There was new industries that came. Different industries. Yeah.

Yep. And even more of these jobs were taken by different demographic groups, which is something that, like, surprised me. So you're finding that after these local economies recover, the people who take the jobs are, quote, more likely to be native-born Hispanics, foreign-born Hispanics, and other races, women, and then the college educated.

Like, these jobs, disreporting. So that's actually really important. So U.S.-born Hispanics, moved heavily into these places, young U.S.-born Hispanics, and then foreign-born adults, many of them non-Hispanic actually, also moved in. And then there were lots of, you know, even though men and women actually lost jobs in relatively equal numbers in manufacturing because a lot of manufacturing job losses in textiles and so on, which was very female intensive at that time, you saw a big rebound among women

and women who had not even previously been in the labor market entering, but not so much among men. So the gender ratio shifted. But the point is, though, that, like, the economy rebounds in these places, but it doesn't rebound for the people who were hurt directly by the shock. That's absolutely correct. So you spend a lot of time talking about the existing models and sort of this understanding of economics, because that's kind of the whole point in this paper, right? It's how local labor markets respond to trade and other shocks. And you're really stressing, like, it's been wrong. I think you've made that, like, abundantly clear. But, like, what specifically these days do you think the profession is getting wrong about like the sort of readjustment to trade

shocks? And how do you think this new paper kind of fits into that and how you think the thinking should go? Well, economists like to think of the world as, you know, people doing, making optimal decisions. And so you say, well, do you imagine there are some frictions or some frictions to changing occupations or some friction to changing places? And so it takes a long time for people to make the adjustment. But eventually, you should expect it to happen. And so that, you know, this is kind of a transitional cost. I guess what, what, what, surprise us is the two mechanisms that seem most likely to kind of encapsulate that in the reward are one people changing from manufacturing to non-manufacturing and the other is them relocating

to other places where better opportunities would be available and we really don't see those operating this kind of changing sectors changing locations and so it really seems like to a substantial degree people have cast their lot by the time they're you know kind of prime age adults in what they're going to be doing in adulthood and then if that changes very rapidly it's it's quite Why challenging for them to adjust? Just to recap, so there's the two mechanisms. One is like, oh, I change my industry. I get a different job.

The other is I move to a different place. And both of those seem to be broken. Instead, these people, I guess, disproportionately are, what are they doing? They're unemployed or are they on social? Many of them stay in declining manufacturing industries. Manufacturing goes into long-run decline, and many of those people who stay working stay in manufacturing to some extent, some leave the labor force, you know, some retire, And some transitions are non-manufacturing, but it's not quantitatively very large.

So many of them kind of age in place. And this is a bit of speculation, but like what is driving that? Is there like a behavioral response? Like, is this like an irrational sort of thing? Or are there incentives in the system that like, like disability benefits or something that allow this to? It's a very rational thing. People, you know, people, why are you doing the job you do? It's the thing you're best at.

The thing you enjoy, the thing that your skills and you've invested in skills and things that you're, it's the highest paid thing you can do. most people are doing the job that pays them the highest pay they could earn, right? And so the next set of opportunities, the outside option is very rarely as good as the one that you have. That's why you're not taking it already. And so when manufacturing clients, you know, you say, well, this is my identities, these are my skills, this is the thing I'm best at doing. And so people stick with it to the degree they can. As the sector contracts, definitely some people lose jobs.

Some people transition on manufacturing. Some people leave the labor force. But other people, a lot of what the contraction occurs is they'd stop hiring. And so new people don't enter, the sector can, once it starts contracting, it just, you know, really plummets over the next 20 years. But a lot of that is through reduced entry. So I think one reason why the China shock paper resonated so much is it kind of coincided with the rise of Trumpism. And like I feel like every time I read one of your papers, I just feel like light bulbs going off. For example, this paper, like I kept thinking about like the populace and nativist politics we've seen explode over the last decade plus.

I'm just curious, like, has this whole project sort of open your eyes to this? Does it make more sense what's happened politically? Well, I can think my eyes have been open to this for a while, because I've been working on it for a while. But this does give more depth and nuance to the sense of, wow, where, you know, essentially a lot of people, you know, they saw their communities decline, and then the world changed very rapidly around them while they kind of aged in place. You know, I mean, data doesn't speak in words, but that's a very dramatic story. I want to say that, you know, there are many ways the U.S. could have handled better this trade shock, right? I think the U.S. was very blinded by the belief that there was nothing to worry about. So why do you need a policy for a thing that's not a problem?

And because of that, you know, kind of almost an ideological belief that no one could be harmed, we didn't have in place adjustment policies to support workers to who want to change jobs, right? You know, the Obama administration actually really ran a terrific experimental project. with the Trade Adjustment Assistance Program, where essentially they said, look, if you take a new job soon, will help make up part of the difference between your old wage and your new wage, at least for a while. And that is attractive to a lot more people who don't want to go back to school. And Brian Kovac of Carnegie Mellon University and co-authors finds that this was actually really effective in helping people get back into the labor market. It didn't, like, raise their earnings over the long term.

It prevented the kind of long-term displacement. And then there was no effort to really buffer the rate. at which this occurred. You know, ever-market transitions are slow. You know, things that happen over the course of a generation are much more manageable than things that happen over the course of a couple of years. And the China trade shock was just incredibly rapid. And there were provisions to slow it down in the side agreements that are negotiated,

but they were not used. The Bush administration didn't think they were necessary. And so, you know, if you had to do it again, you know, some people say you shouldn't, but if you're going to do it over again, I would think you would really want to decelerate it to have it occur over a longer period time and you'd want to have many more policies in place to help individuals and places adjust to that. Yeah. Just a few more questions. So just to talk a little bit of the Trump administration's recent trade actions, it seems that there's at least two different camps. Like they both support, they all support tariffs, but there's one camp where

like, yeah, probably won't be great for the economy, but Trump is doing all this stuff for politically necessary reasons, national security, drug inflows, that sort of stuff. And they kind of view tariffs is like this tool to accomplish political ends and they're like sure maybe that will have some economic costs. And there's this other camp that seems actually stronger in Trump 2.0 in this administration. They look at like all the pain of free trade inflicted on Americans. Like and often like I think sometimes they cite your research. And I guess they think terrorists will offer like hope that like maybe all this can go into reverse. So what is your perspective on this? Like why do you think terrorists are so back in vogue and do you think they can help reverse the damage

that you and your colleagues have so diligently found? So I think you're right that there are these two camps, one who views tariffs as a kind of a temporary negotiating tool, a way to rebalancing, another to use it as we all just isolate ourselves from the rest of the world. There's a lot more to disagree with in the second camp, right? Because so much of the stuff that even is manufactured here uses foreign parts and all these intermediary goods. And when you place tariffs, you're basically creating costs and frictions for all of those

transactions, you're going to raise costs for U.S. manufacturers, and we saw the first round of Trump tariffs didn't do much for U.S. manufacturing. We don't see any evidence that actually caused a rebound. It mostly caused prices to rise. Now, that doesn't mean there's no role for trying to regulate or control trade. I think if you were trying to make the case that what we really need to do is reinvigorate certain sectors, right? You wouldn't say, well, what we really need to get back is, you know, sock manufacturing, commodity furniture, dull assembly, right? Those things aren't coming back and they couldn't be competitive in the United States. Those are low value added, labor-intensive sectors. They're just not viable in a country like ours anymore. They

were in some sense legacy sectors. They wouldn't have stayed with us forever. But you could say, well, what we really want is, you know, we want to have EVs. We want to have semiconductors. You want to have solar collectors. You want to have wind turbines. We want to have networking equipment, telecommunications, aviation. High tech stuff. Exactly. Value add. And then you could say, well, how would we do that? Well, we could create some temporary barriers to protect ourselves, but then we've got to invest in ourselves simultaneously, right? You can't just keep winning races by hobbling your opponents. You eventually have to bulk up and run. So in other words, you're saying something that's, instead of this blunt instrument of just

throw up a wall, you're saying, like, we need more of a strategic vision where, sure, like, you're open to tariffs as part of a more comprehensive strategy to, like, create, like, growing industries that will provide good jobs to a lot of people who have been left behind in America. And not just good jobs, but also advance the technology, right? If you're not playing in those fields, you're not going to be at the frontier of them. You know, it matters to the U.S. that we have, you know, Apple and Microsoft and OpenAI, right? It's not simply that we like those products. We like the fact that they are based here.

A lot of the profits flow here and the innovations occurring here, and that leads to more innovation. And we don't want to lose that edge. So, you know, I think there's – and that's not just about jobs. It's also about productivity growth and profitability. and economic leadership and not even thought leadership. Thanks to David Otter. Do you have suggestions for people, I don't know, like economists, policymakers, policymakers, business leaders

that I should interview for a future newsletter or even topics you want to know more about? Let me know. Just email your ideas to Planet Money at npr.org. Okay, as always, thank you for being a Planet Money Plus supporter. It's one of the best ways to help keep our work going. Another good way is to spread the word. So when you love an episode, please feel free to tell a friend or send them the link.

It really matters. We'll be back with another bonus episode for you in a couple of weeks. I'm Greg Rosalski, and this is NPR.