Washington and Seattle were insulated from the trade shock that hit the Midwest when China became a big exporter. Indeed, China became the largest destination for the state’s exports. The end of that honeymoon might be in sight.
This past week, China’s COMAC C919 airliner made its first test flight.
Up until now, Boeing has been China’s leading supplier of commercial airliners. The C919, which would compete with the 737, may eventually change that.
Last year, Boeing estimated China would become the world’s first trillion-dollar airplane market, with demand for 6,810 passenger jets over the next 20 years. That would be around one-sixth of total worldwide demand, forecast at $5.9 trillion.
Setting aside Boeing’s current slowdown and fears that the company, despite enormous tax breaks, may continue moving jobs out of the Puget Sound region, are we headed for a “China Shock”?
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MIT economist David Autor and his co-authors coined that term in an influential 2016 paper that examined the rise of China after its entry into the World Trade Organization and its effects on American manufacturing.
While the phenomenon lifted huge numbers of Chinese from poverty, showing “trade’s transformative economic power,” it also upended conventional economic thinking on the losers.
Gone was the idea that trade generally produced winners all around, with slight and short-lived shudders along the way. China provided the laboratory to show how this could be wrong.
Specifically, the enormous size, relative skill and cheaper labor of China hit specific industries and states very hard, making adjustments impossible — and creating plenty of disaffected working people. The damage would also prove long-lasting.
From 1979 to 1999, national factory employment in the U.S. fell by 2 million. But after China entered the WTO in 2001, another 3.5 million jobs were quickly gone by 2007. (Another 1.5 million manufacturing positions were lost by 2010).
At a recent City University of New York forum, Autor said China’s economic development “is a fabulous thing from a global perspective. This has been the best thing for the global middle class in a millennium … But it has been extremely disruptive for U.S. employment, especially U.S. manufacturing employment.”
The industrial Midwest was among the regions worst affected by the trade shock. And the 2016 presidential election was decided by fewer than 78,000 votes in Michigan, Pennsylvania and Wisconsin.
Barack Obama won all three, plus heavy-manufacturing Ohio, in 2008 and 2012.
Many factors swung the 2016 election, but for those who want to say it was mainly the economy, the China Shock carries weight. Candidate Donald Trump promised to place large tariffs on Chinese imports (although as president, he has backed down).
The situation can’t all be blamed on China. Manufacturing as a share of the workforce has been shrinking for decades. Many jobs were lost to automation. The Midwest lost others not only to Mexico with NAFTA, but also to the American South. Factories have been on the move since the dawn of the Industrial Revolution.
But the post-2001 trade shock not only disturbed certain regions especially hard, it roiled a workforce where earnings for those with a high-school education or less had already been stagnant or falling.
Once workers had a shot at the blue-collar gentry through secure, well-paying union jobs. While this opportunity had been declining since the 1980s, the stress really kicked up after the turn of the century. And efforts at retraining often failed to land people jobs paying as well as those they had lost.
Washington, and especially the Puget Sound region, was relatively protected from this massive wave.
For one thing, trade and tourism from Asia add to the local economy. Also, Washington has a potent technology sector that few other states can match.
But the big flying enchilada is Boeing, the state’s largest manufacturing employer and one of the premier American exporters.
While the Midwestern states above showed pronounced drops in factory employment after 2001, Washington began falling from its recent peak in 1998. After the turn of the century and the brief 2001 recession, manufacturing employment turned back up, although it has never reached its 1990s levels.
That might change if COMAC becomes a major competitor for Chinese commercial airplane orders — and for orders elsewhere in the world.
In the case of the Midwest (or the Southeast with textiles, apparel and furniture), the shock came from Chinese exports.
As Autor put it, “All of a sudden we have a very competitive low-wage country making high-quality goods that are a better deal for consumers. Consumers start substituting toward them. That raises consumer welfare — it makes lots of goods cheaper — but it also has a very concentrated impact on the places that make those things.”
For the Puget Sound (and Airbus hubs such as Toulouse, France), the potential trade shock is from the rise of a peer competitor.
The C919 may bring a cost advantage. Boeing is already emphasizing cost cutting (besides corporate greed, as critics say) to battle Airbus. But merely being cheap won’t make it a threat. Who wants to fly in a cheaply made airplane?
Also, China is no longer a currency manipulator, as Trump charged in the campaign. But it doesn’t play by the same rules as the United States and Western Europe.
COMAC, or the Commercial Aircraft Corp. of China, is owned by the Chinese government. Beijing employs a number of stealth protection measures, especially to insulate what it sees as “strategic industries.” And President Xi Jinping wants to wean his country off advanced technology from the West.
Together, this might provide a harsh awakening for Washington, which last year was the No. 1 state in merchandise exports to China. Nearly 59 percent of those goods were airplanes and aerospace equipment.