The economy’s ‘China Syndrome’

February 2, 2012

Mitt Romney’s thumping victory in the Florida primary this week is bringing us closer to a Romney-Obama face-off in the autumn. While we do not know for sure if Romney will clinch the Republican nomination, if he does, we can already say what the central question in November will be: Is the United States one nation under God, or has it become a country where the government needs to secure a better deal for the 99 percent?

We know Romney’s view. In a television interview last month, he explained: “When you have a president encouraging the idea of dividing America based on the 99 percent versus 1 percent — and those people who have been most successful will be in the 1 percent — you have opened up a whole new wave of approach in this country which is entirely inconsistent with the concept of one nation under God.”

Meanwhile, in his State of the Union address, the president opted explicitly for the 99 percent perspective. Restoring their fortunes is “the defining issue of our time,” he said. “No challenge is more urgent. No debate more important. We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules.”

The Obama analysis gets a lift from “The China Syndrome,” a recent paper on the impact of trade with China by a powerful troika of economists: David H. Autor, David Dorn and Gordon H. Hanson. The empirical study, which was cited in an important speech on inequality a few weeks ago by Alan Krueger, chairman of the president’s Council of Economic Advisers, is particularly significant because it marks a shift in consensus thinking in the academy.

In the debate about the causes of growing income inequality, U.S. economists have tended to opt for technology as the driving force. Indeed, in his remarks, Krueger referred to a survey he did of those economists, who overwhelmingly cited technological change as the most important factor.

But drawing on detailed data from local labor markets in the United States, the authors of the “The China Syndrome” argue that globalization, and in particular trade with China, is having a huge impact on blue-collar U.S. workers: “Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment.”

The deleterious effects go beyond those workers who lose their jobs. In communities hit by the China Syndrome, wages fall — particularly, it turns out, outside the manufacturing sector — and some people stop looking for work. The result is “a steep drop in the average earnings of households.” Uncle Sam gets hit, too, especially in the form of increased disability payouts.

Autor, Dorn and Hanson are no protectionists. But in a challenge to the “one nation under God” view of the world, they offer a sharp reminder that the costs and benefits of trade are unevenly shared. As they put it, their finding does not “contradict the logic” of arguments favoring free trade: “It just highlights trade’s distributional consequences.”

When I raised the issue with Joseph E. Stiglitz, the Nobel economics laureate and longtime doomsayer about the downside of globalization, he practically crowed with vindication. “The economic theory is very clear,” he said. “What happens when you bring together countries which are very different, like the United States and China, is that the wages in the high-wage country get depressed down. This was predictable. Full globalization would in fact mean the wages in the United States would be the same as the wages in China. That’s what you mean by a perfect market. We don’t like that.”

The truth is we are no longer living in “one nation under God”; we are living in one world under God. Globalization is working — the world overall is getting richer. But a lot of the costs of that transition are being borne by specific groups of workers in the developed West.

We are accustomed to thinking of the left as having an internationalist perspective. Liberals are the sort of people who worry about poverty in Africa or the education of girls in India. The irony today is that the real internationalists are no longer the bleeding-heart liberals, they are the cutthroat titans of capital.

Here, for instance, is what Steve Miller, the chairman of insurance giant American International Group and one of Detroit’s legendary turnaround bosses, had to say about globalization and jobs. “Well, first off, as a citizen of the world, I think everyone around the world, no matter what country they’re in, should have the opportunities that we have gotten used to in the United States. Globalization is here. It’s a fact of life; it’s not going away. And it does mean that for different levels of skill, there’s going to be something of a leveling out of pay scales that go with it, particularly for jobs that are mobile, if the products can be moved, which is not everything.”

No matter what passport you hold, if you run or own a global company, that is not really a big deal. But as Autor, Dorn and Hanson show, if you are a U.S. worker, that “leveling out” can be painful indeed.

Smart policy, however, can make a big difference. Europe may not seem to have much to teach the rest of the world at the moment, but as Chancellor Angela Merkel leads a group of German industrialists to Guangzhou this week, Americans might want to study how Germany has turned the China Syndrome to the benefit of both its chief executives and its blue-collar workers.


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There is more wisdom in this article than misinformation. I’m impressed! It is refreshingly ambitious in scope that it seems more fair to try to supplement information that seems misleading than “point the finger”.

I personally loathe the OWS terminology without regard to who uses it or why. If you ask ten different people to describe who is in the 1% and who is in the 99% you’ll get ten different answers! The “common ground” necessary to initiate or carry forward meaningful discussion is conspicuously absent.

Similar is the “one nation under God” excerpt. I would hope Romney’s words sought to invoke the “one nation” bedrock which originates with our founders, our Declaration of Independence and our Constitution; and NOT the “under God” which was inappropriately insinuated into OUR Pledge of Allegiance by religious fanatics to advance their own agenda almost two hundred years later.

Do those last two words add anything whatsoever to the point Romney needed to make? No. They are political pandering to today’s religious right whom we can thank for the current Susan G. Koman-Planned Parenthood controversy.

It is discouraging to listen to our “lords of the dismal science” abstractly contemplate the lint in each other’s navels before speculating on how to rearrange the deck chairs on the Titanic. The threat of ice ahead is NOT “so many jobs lost here” or “so many jobs gained there”. It is the DIFFERENCE in the quantity and mix of jobs required by the world economy of the past, present and future.

America is struggling to “come to grips” with the absolutely unprecedented number those that have been or will be laid off in the transition. The “dirty little secret” is that a majority of older workers without degrees and/or whose “specialty” is no longer needed will find another job; and lack the financial resources to retire. As the faces of more and more friends and relatives are included, this struggle “feels” more and more “personal”.

Companies aren’t stupid. Those hiring are younger. They prefer younger, more tech-savvy people who are numerous and willing to work part time.

It’s not “rocket science” to chop complex processes requiring multiple skills into simpler ones easily mastered in two weeks that part time people can and will do without the additional expense of fringe benefits, advancement or retirement. This is the face of efficiency under our present tax system.

Any meaningful “solution” to current personal and geographical economic disruption begins and ends with our tax code.

Posted by OneOfTheSheep | Report as abusive

It is interesting, although very, very bitter, to see, at long last, that many major economists now recognize what many ordinary citizens have been directly experiencing and reporting for about 30 years, i.e. the giant drain of capital, technology and jobs from the West to China, as authorized by international agreements designed and signed by ill-advised Western governments, subsequently exploited by cynical and greedy Western capitalists, with no loyalty or patriotism whatsoever with their countries and people.

As to “One nation – or one World – under God”, as quoted in this article, this statement is meaningless as long as one does not specify which “God” is here referred to. At least as far as the US is concerned, the fact is that this “God” has been overwhelmingly “Money and Hypocrisy” for about thirty years, and not at all any religious, ethical or moral principle. The fact of the matter is that this “God” of “Money and Hypocrisy” has been guiding the so-called “elites” of the US and of other major Western countries, especially through the globalization process which they themselves recklessly initiated. In so doing, the US and the West have most likely committed their “suicide”, allowing the fast and unstoppable emergence of China as the dominant power of the new centuries.

Posted by llouest | Report as abusive

There’s obviously some truth to the widespread perception that growing income disparity in the developed world is driven by outsourcing of blue collar jobs to the developing world. But few people realize the important role that the unprecedented global credit expansion since the 1980s has played, and is still playing via public deficits.

It’s important to understand the accounting realities of where profits come from. High profit levels are after all the source of the upper crust’s burgeoning wealth. The Levy Institute has come up with a very helpful profits equation, which defines the sources of aggregate profits on a national level. They are business investments, business dividends, fiscal deficits, trade surpluses, and household net borrowing. Since business investments are largely credit-driven, there is a very strong correlation between credit expansion and domestic business profits.

That doesn’t include the profits earned abroad by US companies, which is where outsourcing does come in. But trade deficits depress domestic profits.

And fiscal deficits inflate domestic profits. Which helps explain why wealth polarization has continued under Obama.

Posted by tom_the_bear | Report as abusive

Surprisingly well written and insightful Op-Ed piece Chrystia…. Is that really you ? ?

Posted by edgyinchina | Report as abusive

It’s disingenuous to blame President Obama for dividing America.

Everyone in my cell phone directory is a lifelong member of the 99%. Most of them are college educated. All of them have more integrity than any CEO on Wall Street.

I can assure Governor Romney and his supporters that everyone I know thinks that the Wall Street “one percenters” should have gone to prison for fraud a long time ago. There seem to be some legal barriers to that and I can assure you that those barriers were not put there by us 99ers. I suspect those barriers to justice were put in place before Obama even became a senator… perhaps right after the Savings & Loan crisis.

Everyone I know is also rather disgruntled when it comes to paying such a high percentage of our hard-earned income in taxes. I don’t mind that Romney has done so well; I even admire his success, but I can assure you that the laws that permit him and other “one percenters” to pay less 15% in taxes and laws that permit Romney to set aside more than 100 million tax-free USD for his children through carried interest is something no one in my cell phone directory would ever have contrived on behalf of the 1%.

The troubling chasm between the 99% and the 1% was put there by the 1%. If they are so deeply offended by that gap, I invite them to close it.

Posted by breezinthru | Report as abusive

What I can’t figure out is how any of this comes as a surprise to anyone? Both parties have sold out the American middle class. The Clinton/Gore administration was blatantly pro-China and Bush/Cheney pushed through the Trade regs. These people aren’t stupid, they knew the effect it would have. Essentially, our elected officials have stolen our wealth from us and redistributed it to other countries. It’s that simple.

Posted by GLK | Report as abusive

Relevant and concise.

Posted by wbig | Report as abusive

“But a lot of the costs of that transition are being borne by specific groups of workers in the developed West.”

Not so. The costs are borne by virtually all workers in the developed West. A labor glut in manufacturing soon spreads to every sector of the economy as workers who would otherwise be employed in manufacturing are forced to develop new skills and compete for jobs in other sectors in the economy.

Posted by Pete_Murphy | Report as abusive

@breezinthru, while I agree with what you wrote I don’t agree with giving Obama a pass. Yes, you can’t realistically blame him for the creation of the all-powerful 1%. On the other hand few will deny he’s done a nice job of fanning the flames of class warfare while simultaneously doing nothing to correct the core issues that created the disparity in the first place. Romney is clever to focus very clearly on rebuilding middle class wealth. Whether he’s truly the middle class Messiah remains to be seen. Personally, I’m a Ron Paul fan and am a pessimist with regard to Obama and Romney doing anything that American’s can take to the bank. The blood letting of jobs and wages has been going on for decades, reversing it is a pipe dream.

Posted by GLK | Report as abusive

Problem with income inequality is driven from consumerism. Ahealthy economy is supply based not consumer based. The trick is that when acompany moves overseas to generate cheaper labor to gain more profit, thereceiving country should tax for the amount of salary differential to createbalanced trade for products produced overseas, as if it were produced in theirnation, where labor costs are higher.

In this way, the concept is trade rather than company’sprofit. This will cause to limit substantial growth of companies and theirprofit base, yet allows the market to remain healthy in the long run. Competitionremains healthier but harder and drives the market to be more efficient todevelop products without harming employee’s incentives in being moreproductive.

Many developing nation will experience lower growth rate butthey will experience a better distributions of goods and services and incomeequality. It also limits shocks to the systems that come with higher growthrate, as large portion of society will not be left out by incomeinequality and they will remain hopeful to be a part of the future growth.Unlike what is happening now.

Therefore, trade should be based on the concept of producinga product in a place that has a higher competitive advantage for that productwithout consideration of labor cost. The tax rate of imports should generatethat balance.

In a sense, the core business model of capitalism has takenthe wrong turn and instead of realization of the core problem, we have tried toadjust tactics to continue on the path that is based on company’s wealth. Economic theory should not concern itself with company’s wealth but trade balance. Cheaper product or better value must comefrom more efficient businesses rather than relocation to access cheaper labor.

Posted by Fixer | Report as abusive

Great to see the world waking up to this reality. Few folks understand that our $650 billion goods trade deficit represents about 10-15 million jobs overseas (over half our unemployment problem) and that this amount must be borrowed, a sort of vendor financing, so we pay for the goods plus interest, plus unemployment, higher disability, etc.

The true costs of trade with low-wage countries is not captured in the price of the goods. Government and labor is stuck with the bill while capital (owners) profit.

America’s strength in the future will be measured by its economic prowess: job creation, trade deficit, debt to GDP ratio, and budget deficit.

The leader that can explain what is actually happening and has a reasonable vision for the future will win. Obama left the door open by not breaking up the big banks, extending the Bush tax cuts despite their $3 trillion debt price tag over a decade per CBO, and having no plan for bringing the jobs home.

Posted by Farcaster | Report as abusive

My original words should have read, in part: “The “dirty little secret” is that a majority of older workers without degrees and/or whose “specialty” is no longer needed will NOT find another job; and lack the financial resources to retire.”


“The gap among rich and poor nations is not going to be decreased no matter how you look at globalization, therefore III WW”?

Genuinely “poor” nations do not start wars. They lack the technology, the productivity and the money to do so. War disrupts the flow of goods and commerce from which the crumbs that enable them to survive depend. They suffer the most from war even if on the sidelines.

Only those capable of “taking something belonging to another and holding it” benefit from war. Those who throw the first rock seldom throw the last.

Posted by OneOfTheSheep | Report as abusive

We have a $650 billion goods trade deficit, which represents about 10-15 million jobs, over half our unemployment problem.

Ben Bernanke wrote a detailed piece about this called “The global savings glut” in 2005, which Krugman summarized in an Op Ed called “Revenge of the Glut.”

The U.S. created a net 2 million jobs from 2000-2009, versus 15-21 million in each of the three preceding decades. Even before the crisis hit and including the employment due to the housing bubble, employment was still growing slower than historical trend.

Manufacturing employment declined from 17 million in 2000 to about 12 million today.

Will can ill-afford a repeat of this performance.

The policy choice is to tax companies for the wage differential, to keep the playing field level. Otherwise, we risk 100 years of progress on the labor front.

Posted by Farcaster | Report as abusive

The 10,000 lb. elephant in the room nobody mentions is the purposefully suppressed value of the Yuan. It’s lack of value relative to most of the world’s currencies is holding the world’s free-trade hostage. You want to create more jobs in America – then somehow get China to inflate the value of their currency, thereby giving profit-driven American companies the incentive they need to keep manufacturing at home in the US. America has the foundation to support it’s own economy (no, I’m not a protectionist) by simply manufacturing the very goods its citizens purchase.

Ditto for Germany, Japan and any other manufacturing based economy…simple, huh.

Side note:

It’s not the companies’ fault, either. They have a responsibility to their stockholders to provide the greatest margins of profit. Globalization allows for that by taking advantage of the inequalities in different values of our currencies (re: China/US) so it’s completely understandable. Sustainable in the long-term? Nope. Good for the US? Most def not!!

Posted by Nothingmuch | Report as abusive

“Uncle Sam gets hit, too, especially in the form of increased disability payouts.”

In what states does that happen?

Posted by paintcan | Report as abusive

Agree with the analysis that a full globalization will eventually equalize the wages between the developing and developed countries in question. It is pretty much like the concept of thermal equilibrium in physics. Worse yet, it is often that different rules are applying to the two different countries in question. For instance, the environmental laws and their enforcement will be very different in a developing country such as China, which put the businesses and their employees in a developed country such as the US at further disadvantages.

Posted by princeton_walk | Report as abusive

Globalization for thee but not for me.

China’s import taxes average 28%, for the US import taxes average just 1%.

Why not change our tax system, shifting away from income taxes towards import taxes to provide an incentive for manufacturing in the USA?

Protectionism is how countries get rich. Period.

Posted by alexhamilton | Report as abusive

“our elected officials have stolen our wealth from us and redistributed it to other countries”, you know, most Chinese people think the same things. and most of the countries have the similar problem, 99% and 1%.

Posted by lws | Report as abusive

The wealth of our nation has been “strip-mined” over the past 20 years (the past 10 especially) in the form of 1-jobs go away, thus, 2-salaries go away (great savings in labor cost differentials) and the “savings” profits go into the pockets of the 1%. Then products (made inexpensively in China) are brought back, sold here for out-sized profits, 3-bigger profits into the pockets of the 1%, thus it is essentially a “stip-mining process” of taking from the middle class and poor, and giving to the rich. Duh??? Grant Clayton, CFA, Ph.d. (candidate) said, “The ‘Job Creators’ are not creating jobs, building factories (in the US) and producing more is that they “know” the workers don’t have the money to buy more. The “Job Creators,” said Clayton, have no concern for the nation’s debt or taxation which after deductions is “average” taxation for the industrialized world. My conclusion is the Republicans well understand this and conjure up these bogey-men scenarios of how the rich (oops “job creators”) need even more tax breaks and deductions, and we must suffer mass austerity to appease the “job creators” in order to cajole them into “creating new jobs” or the Republicans simply “know” what they are doing–“strip-mining” our nation of its wealth (Trickle Down … right! What then is the end of it all? Opportunity now exists in other lands as it flows away in annual, incessant streams of wage suppression and lay-offs. Is this really that hard to get? “Go figure.”

Posted by WouldChuk | Report as abusive

It’s amazing that one of the biggest contributors to job losses and lowering living standards is ALWAYS left out of these articles. While most of the posters are busy blaming CEOs and management, NOBODY is even acknowledging the abysmal education here in the US. I see people every day that never learned to count change. People that can’t use the most common parts of the English language correctly. People that dropped out of school or just cruised through school without really trying. How do you expect incompetent and illiterate people to secure anything more than a “burger flipper” job?

I spent 30 years in Silicon Valley, 22 of them as a hiring manager. of 100 QUALIFIED applicants, maybe 5 would be American born. Engineering appears either too difficult or too boring for them. High tech companies will NOT hire incompetents when no qualified people show up. They move their design centers overseas. I’ve been through it in several companies, and nobody likes doing it because of the cultural and time differences, but like it or not, America is turning into the land of the lazy.

Instead of teaching why Billy has two Mommies (neither one his birth mother) try teaching math and science. As long as we have third world education, we’ll have third world jobs.

Posted by iq160 | Report as abusive

@GLK “Both parties have sold out the American middle class…” in essence, and as a “contractor” (couldn’t get a corporate job after 9/11 lay-off) I’ve watched/helped outsource jobs everywhere around the world, “they” the corporations have been “strip-mining” the wealth of this nation. This time “it is different.”

Posted by WouldChuk | Report as abusive

Nevertheless, the quandary we now find ourselves in is that the 1% have largely captured our government, own our media, and thereby “inform” our people. One can expect that they will use this power to further their myopic self-interests, and will become even richer and more in control. Political party is fairly irrelevant to this problem. How to best get out of this vicious cycle, is a key question.

Posted by xcanada2 | Report as abusive

A well written and insightful article. I especially enjoyed reading the cited report, “The China Syndrome”, quite a bit of thought provoking information. And Stiglitz is right, there will be some equalization of wages as globalization progresses. For a country like the US that has always enjoyed higher wage standards than say, China, this isn’t working too well for us.

Posted by The_Traveler | Report as abusive

Why is there no mention of the fact that China cheats by holding their currency to an artificially low exchange rate?

The mega corporations that manufacture in China profit from China’s cheating, which is why China continues to get away with it. And the wealthy 1% of the population profit handsomely by holding the shares of these mega corporations. In other words, they benefit enormously from the China’s artificially low Yuan.

So while rich American shareholders have gotten steadily richer, American factory workers have lost their jobs. This has contributed to America’s real estate crisis, and the ballooning national debt.

Those who are not suffering can speak calmly about “leveling out” wages. But to be fair, we should first talk about “leveling out” currency exchange rates by requiring China to allow its Yuan to float freely. Let’s ensure a level playing field before we smugly endorse “leveling out” US workers’ wages.

Posted by DifferentOne | Report as abusive

I was laid off from a major and used-to-be-iconic US corporation (a recent bankrupt, bwt), because our entire production line went to Mexico… 900 people were let go in one day.
And I was laid off from yet another major and used-to-be-iconic US corporation (not a bankrupt yet, bwt), because the entire IT project was outsourced to India…

well, “Globalization is working”, but I am not…
so my question is: FOR WHOM is Globalization working?

Posted by UauS | Report as abusive

Two observations:

1) Globalisation isn’t a “here and now” thing at all. The market for violins has been globalised for 400 years. For porcelain, 300. For aerospace, since the demise of the deHavilland Comet. For computers, since the 1960s, for cars since the 1980s, and so on. (As a Brit, one tends to notice the loss of these industries more!) Globalisation is more of a rolling wave that gradually overtakes various industries. It’s not just the low cost of making things in China, but the low cost of transporting them from there which means that they command more industries than just porcelain these days.

2) When Amazon, a global company, opened their first UK warehouse, it was reported in the press than the UK staff worked the same hours and were expected to stuff the same number of boxes as their US counterpars, but for 70% of the pay. It seems clear that as globalisation extends further into high-wage economies like the US, implicit subsidies such as this will also be eroded.

Posted by Ian_Kemmish | Report as abusive

One common streak running here…that the US is THE world….I have amazing news..there ARE nations outside the borders of the US…!!!

Posted by mgb500 | Report as abusive

@iq160 I understand your frustration for the lack of qualified candidates, but I don’t think you understand how education costs and compensation and working conditions have changed in the tech and science fields.

When you went to school your 4 year degree probably cost $2,000 or so. We you got out you had a fair number of jobs to choose from that paid around $20,000 a year.

Now if I go to get a good tech degree and possibly a masters degree that is going to cost me about $65,000 – $100,000 and my expected out of college earning will be around $40,000 – $60,000.

Also, when you went to school there was something called an “entry level” job. This is probably where you got you start and gained to the experience to be “qualified” for the jobs you are talking about.

Do to 20 years of outsourcing in the tech industries there are fewer and fewer Americans with enough “entry level” experience to be qualified for these jobs.

So this is what an American 17 year old looks at when he decides what to do with his life and thinks about computer science.

Get a four year degree working really hard all four years. Not being able to go out or hold a part time job to help defer the cost. Ring up $50,000 – $70,000 in debt.

Go out into the work force and realize that there are few if any entry level jobs and go back to get your masters. Spend another $25,000 in debt and now while working just as hard in school start joining up to do a bunch of free labor in whatever open source projects you can find to try and get experience on paper.

Get out of school, move back home with your parents. Start your own project, knowing you won’t make any money with it. Spend a year on it and hopefully it will get popular and you can network your way into a place for $40,000 – $60,000 a year.

Once you get there you’ll work 60-80 hours a week. Sometimes more. Since you are a “knowledge worker” you don’t get overtime and when you sit down with a calculator that if you worked in a warehouse for $10-$12/hr with overtime you would make the same amount of money.

Since you sit at a desk for 60-80 hours a week you don’t have time for exercise you’ll be in terrible shape and feel unhealthy all the time.

Unfortunately, people in these outside countries have huge advantages now. Their education is cheaper. There is more “entry level” positions and their wages typically go further.

So although you may be shocked. Most people like me, who actually compete as a _worker_ in the global economy, wishes he got a business/finance degree.

Which is what all these smart people are doing. Because working in the tech industry when you have to pay the price of US education is a rip off for a worker. It seems pretty obvious when you spend a minute to think about it.

Posted by fi10000 | Report as abusive

The 1% can get richer by driving down labor costs. Globalisation is merely the realignment of industries and services to countries with little or no labor laws, Unions and employment protection. People in developing countries are available in large numbers who work long hours for wages next to nothing. Developing countries are populated by people that haven’t reached a state where they can be arrogant enough to demand the idea that they have Rights by Law. Their world is in flux and by sheer numbers give rise to a fast flowing river of developing groups of people being used by the 1%. Surely this common denominator of 1% leaves the remaining 99% of the developed countries destitute of further progress to those who have yet to do likewise.
The rich do indeed get richer. The poor merely aspire to do likewise. It’s a question of balance. etc, etc

Posted by Ceorl | Report as abusive

Hey, here’s something interestng about Romney. Look carefully at a good closeup of his head. Note the tuft of hair in the center of his forehead. Behind the tuft is a half moon of baldness. Along the front of the tuft are about ten small bundles of hairs that look very much like hair-transplant bundles. Seems like Romney has a hair transplant. Put it together with his frequent use of “I”, and you get VANITY.

Posted by LouVignates | Report as abusive