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This edition was written by Tristan Loa, Andrew Rosin, Zixun Tan, and David Wessel
The recent surge in exports from China differs from the “China Shock” that followed China's accession to the World Trade Organization in 2001. François de Soyres of the Federal Reserve Board and co-authors find that the earlier shock reflected China’s rapid integration into global trade from a low base. The new phase, which the authors call “China Shock 2.0,” reflects a policy-driven push toward technological self-sufficiency and greater reliance on domestic, rather than imported, inputs. Since 2018, China’s share of global exports has risen sharply, while its share of global imports has increased only modestly. As a result, other countries face more Chinese competition without a comparable increase in Chinese demand for their exports. China is also much larger than it was in the early 2000s, so the export-import imbalance creates greater adjustment pressures for trading partners. Unlike the earlier shock, which was concentrated in labor-intensive manufacturing, the new surge is increasingly concentrated in capital- and technology-intensive sectors, including EVs and batteries, that compete more directly with advanced-economy industries. The U.S. has been partly insulated from direct import growth from China by tariffs and other policies, but the broader pressure on global trade remains substantial. Several other advanced economies have also imposed protectionist measures against Chinese exports, and the full economic impact will ultimately depend on how countries continue to adapt their trade and investment policies amid growing geopolitical competition.
Productivity growth in the U.S. manufacturing sector slowed from 3.3% per year in the two decades before 2010 to minus 0.3% per year in the decade after. Robert J. Gordon and Kenneth Ryu of Northwestern University argue that the roots of the decline date to the decade between 2000 and 2010. While annual output growth slowed to about 1% over these ten years, manufacturing employment fell sharply and low-productivity plants closed, boosting productivity readings even as the manufacturing sector began its decline. Gordon and Ryu provide suggestive evidence that higher import penetration contributed importantly to the slowdown in output growth. Not only did low-cost foreign competition displace domestic demand, but shrinking profit margins reduced the resources available for capital investment and R&D—the average annual growth rate of real investment dropped from 5% to 1% after 2005—which in turn reduced innovation, capital deepening, and ultimately restrained productivity growth after 2010. Other factors, such as underinvestment in robotics, tighter environmental and safety regulations, and shortages of skilled labor, contributed to the decline in productivity growth, the authors note.
Using Current Population Survey microdata from 1976 to 2024, Andreas Hornstein of the Federal Reserve Bank of Richmond and Marianna Kudlyak of the Federal Reserve Bank of San Francisco develop a model that separates long-run trends in the U.S. unemployment rate and labor force participation from shorter-term business-cycle fluctuations across 44 groups defined by age, gender, and education. They find that the trend unemployment rate declined from about 8% in 1976 to about 5% in 2024 as the workforce became older and more educated. By contrast, trend labor force participation rose from the 1970s through the late 1990s as the workforce became more educated and women’s participation increased, then declined as participation gains among successive cohorts of women flattened, participation among successive cohorts of men continued to fall, and population aging weighed on the aggregate rate. As a result, trend participation began to decline even as educational attainment kept rising. Over the next two decades, they project that population aging will push trend labor force participation down from 62.3% to about 60.7%, while the older and more educated workforce will help reduce trend unemployment from 4.7% to about 4.3%.
"In my view, the risk of acting, even if inflation proves to be less persistent, is less severe than the risk of failing to act. Inflation has exceeded our target in 7 of the past 10 years. Should inflation remain above target now, there is a risk that households and firms come to see this as a ‘new normal’ and adjust their behavior accordingly. This would ultimately require an even bigger monetary policy response to bring inflation sustainably to target. The old adage 'a stitch in time saves nine' applies to monetary policy," says Megan Greene, External Member of the Monetary Policy Committee of the Bank of England.
"Given this, I considered voting for a rate increase at our April meeting. Ultimately, I judged that I might have considered that a mistake if the conflict ended immediately; the tightening in the curve following the outbreak of the conflict could arguably have offset the second-round effects already set in motion. I believed it was worth waiting to learn more about the evolution of the shock, even if we wouldn’t learn much more about second-round effects. Of course, we cannot rely on the tightening of the curve to do our work for us – absent a hike in Bank Rate soon, the curve will likely fall.
"Needless to say, we have learned over the past six years how quickly conditions can shift – in weeks, days, or even hours. I think the case for hiking rates grows as the conflict wears on and believe a tightening in monetary policy over the next few weeks or months may be necessary."
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