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Duke University’s great trade economist Ed Tower today emailed to me a new Substack post by Paul Krugman – a post titled “China’s Trade Surplus, Part III.” In this post, the Nobel-laureate Krugman warns of the supposed dangers to the non-Chinese, especially to us Americans, of China’s manufacturing trade surplus.

Although there’s much in Krugman’s post that’s fine and important, much of it – in my non-Nobel-laureate opinion – is weak and wanting. I share here, beneath the fold, a slightly modified version of my reaction, sent earlier today to Ed (and to a few other friends), to Krugman’s post.

Ed,

I just read the Krugman piece. Thanks for sending it. How disappointing.

Start with Krugman’s correct recognition that, insofar as Beijing subsidizes China’s exports, “China is subsidizing the rest of us by selling us goods cheaply.” He mentions this fact apparently to immunize himself from a standard – and appropriate – economic criticism of the points that he’s about to make. But his self-vaccination fails because never does Krugman bother to ask if – and much less to demonstrate that – the benefits that the Chinese allegedly receive in return for the cost of this subsidization are worthwhile. He simply assumes that these benefits (e.g., dominance in “the industries of the future”) exist and exceed their costs.

Moving on, even if we grant that China’s exports are now causing another, larger “China Shock” – and grant also that these Chinese exports are preventing critical, unsubsidized U.S. industries from thriving – this problem would likely be no less real or serious if China didn’t have a large manufacturing trade surplus. That is, even if China imported as many manufactured goods as it exports, its manufacturing exports might still be expanding at a rapid pace and disproportionately affecting particular “commuting zones” in the U.S., causing net employment losses in those commuting zones.

None of the alleged problems that Krugman claims to identify are a result of the Chinese surplus in manufacturing trade. This surplus might be a symptom of Beijing’s trade policies – although Krugman doesn’t do enough to establish this case – but this trade surplus is not, in and of itself, a problem for the rest of the world or a benefit for China. The fact that Krugman chose put this manufacturing trade surplus front and center as the alleged problem is mysterious.

Then there’s this paragraph:

First, China’s surging exports are economically and socially disruptive. The “China Shock” caused by the rapid growth of Chinese exports between the late 1990s and around 2010 eliminated well over a million jobs in the United States, with job losses concentrated in a relatively limited number of communities. In terms of overall US employment, these job losses were offset by job gains in industries not in the path of the Chinese export surge, such as in healthcare. But most of the workers and communities displaced by the China Shock were not able to take advantage of these new opportunities. So while overall U.S. employment and economic growth do not appear to have suffered from Chinese competition, significant numbers of workers and their communities did.

The maximum number of jobs destroyed in the affected U.S. “commuting zones” by the China Shock” is 2.4 million over the course of 13 years (1999 through 2011). That’s an average of 15,385 jobs monthly. What was the total number of layoffs and discharges over those same years? Here are data on layoffs and discharges of manufacturing workers going back through December 2000 – so all but the first 23 of the 156 “China Shock” months. On average, from December 2000 through December 2011, 186,000 American manufacturing workers each month were laid-off or discharged. The “China Shock” rate is 8% of this figure. (If we looked instead at total layoffs and discharges, “China Shock” job losses would, of course, be an even smaller percentage of total job losses – much smaller.)

Is 8% a large number? I’m not sure, but it doesn’t seem to be. More than 9 in 10 manufacturing workers over those years lost jobs for reasons – mostly labor-saving technology – other than the “China Shock.” Shouldn’t Krugman instead be complaining about the “Technology shock”? Perhaps he fancies himself to be wise enough to tell us which, and at what pace, labor-saving technologies ‘should’ be admitted into the economy.

And keep in mind that the absolute number of manufacturing jobs has been falling since mid-1979, so a smaller absolute number of monthly layoffs and discharges today represents a higher portion of manufacturing jobs than did that same number in the past. From 1958 through 1980, the average monthly rate of manufacturing layoffs was 1.6 percent. In contrast, from December 2000 through today (November 2025) – and not excluding the Great Recession and the pandemic – that rate, despite China joining the WTO in 2001, was only 1.1 percent. (I can find no good relevant data from 1981 through 2000. See here.) These data are difficult to square with fears of increased trade with China.

Continuing on, Krugman ignores serious challenges to the “China Shock” empirical findings. (I, too, am happy here to ignore these challenges.) And while he correctly recognizes an often-overlooked fact – namely, the “China Shock” authors never claimed to assess the impact of increased trade with China on the overall U.S. job market – Krugman nevertheless writes as if the economic case for free trade requires, or assumes, that no particular locale suffers any significant net job losses because of changing trade patterns. In this matter, however, Krugman is mistaken.

Still, what about the “China shock” locales? Krugman skates on thin empirical ice when he writes that “the workers and communities displaced by the China Shock were not able to take advantage of these new opportunities [created by increased trade with China]. So while overall U.S. employment and economic growth do not appear to have suffered from Chinese competition, significant numbers of workers and their communities did.”

As it happens, people in these locales seemingly did eventually enjoy the fruits of economic growth. Jeremy Horpedahl finds that the locales in the U.S. hardest hit by the “China Shock” have performed well economically since 2000.

Now what about so-called “rare earths”? These minerals aren’t rare. China’s current dominance in processing these minerals is largely due, from what I’ve learned, to its willingness to suffer the environmental damage that currently is a negative by-product of such processing. So what’s America to do? We can loosen our environmental regulations and, thus, allow more American processing of rare earths. If we don’t, then what choice do we have but to rely heavily on China and other countries for rare earths? If we protect our rare-earths producers from Chinese competition without loosening our environmental regulations, the prices of processed rare earths in the U.S. will rise significantly. But if to avoid these high prices we loosen our environmental regulations, there’s likely to be no need to protect U.S. rare-earths producers from Chinese competition. China’s ‘dominance’ in rare earths isn’t so much a result of trade policy as it is of differences in environmental and other restrictive regulations in the U.S.

More generally, Krugman falls for the fallacy that the thugs in power in Beijing are economic geniuses who can divine just what are “the industries of the future.” (Krugman actually uses, without irony, that hackneyed term.) He gives no reason for us to believe him. He just asserts. And he does nothing more than assert a bit later when he says that economics shows that when there are significant positive externalities, the government should override the free market. Never does he tell us where government officials will get the knowledge to know when such externalities exist and when, given the existence of such externalities, it will be cost-effective for government to intervene. Nor, of course, does Krugman take account of the malign political – i.e., public choice – influences that will distort government-officials’ decision-making.

Krugman’s ‘analysis’ of the dismal performance of the European “digital industry” is comical. He attributes this poor performance to the supposed “winner-take-all” nature of that industry – and the winners were in Silicon Valley. He completely ignores Europe’s suffocating regulatory environment.

I’m going on too long, but I can’t end without a word on this maddening paragraph:

Moreover, the China shock between the late 1990s and 2010 shows that reducing disruption from trade flows can be a valid policy goal. In principle we shouldn’t single out disruptions due to trade as opposed to disruptions due to technological change. But the fact is that the political economy of trade shocks is different from the political economy of technological shocks. Hectoring people in an effort to change that reality won’t work.

In other words, because the general public is currently convinced, mistakenly, that trade is unique at causing economic disruption, we economists should (Krugman believes) play along with this error. Because the general public believes otherwise, we shouldn’t bother demonstrating to the general public the economic truth that there’s nothing unique about trade at causing economic disruptions. We should, instead, write and speak in ways that reinforce this mistaken belief because, hey, that is what most people believe.

If Krugman were an unusually well-informed scientist in medieval Europe, I suppose he’d advise his fellow informed scientists not to bother explaining to the general public – a public that ardently believes in witchcraft – that witchcraft is a silly and dangerous myth.

Apologies for this long epistle.
Don

P.S. Two more thoughts:

First, Krugman is correct that the case for subsidies is stronger than the case for tariffs. In the case of rare-earth’s, for example, it might pay for the U.S. government to subsidize the search for environmentally acceptable ways to process these minerals. But even here: why do we suppose that there aren’t sufficient private incentives to search for such ways? Private entrepreneurs and investors surely are as aware as are government officials of the risk of future Chinese withholding of rare earths from the U.S. market. If this prospect of withholding is sufficiently high, it should incent private entities to start searching for environmentally friendly ways to process rare earths.

Second, Krugman is simply wrong to write that subsidies “don’t raise prices.” They might not raise the prices of the subsidized outputs, but they darn sure do raise the prices of outputs of those industries from which resources are drawn for use in the subsidized industries. And in the long-run, if the subsidized industries become complacent because of their special privileges, it’s not clear that the prices even of their outputs won’t wind up being higher than they’d be without the subsidies.

Even more can be said in response to this post by Krugman, but I will leave matters here.

The post On Paul Krugman on China’s Manufacturing Trade Surplus appeared first on Cafe Hayek.

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