🐼 😲 Bracing for China Shock 2.0

A smart techno-strategy builds on US strengths

Jul 16, 2025

My fellow pro-growth/progress/abundance Up Wingers,

Too much of America’s policy-thinking and policymaking bandwidth is devoted to fighting yesterday’s economic battles. While Washington obsesses over tariffs and low-skill manufacturing jobs lost to China's turn-of-the-century economic transformation, it’s missing a far more consequential threat: China's systematic conquest of cutting-edge technologies.

So argue David Autor and Gordon Hanson, the economists who first documented the original "China Shock" in influential research published a decade ago. That event — the manufacturing employment impact on various US regions from a surge of Chinese imports — was a one-off. As the two economists, along with co-author David Dorn, wrote back in 2016, “The great China trade experiment may soon be over, if it is not already.” And as Autor and Hanson explain in a new New York Times essay, “In essence, China figured out how to do what it should have been doing decades earlier.”

Tomorrow's technologies

That was then, and this is now. Their current concern is “China Shock 2.0,” which they argue is on course to be both devastating and sustained. They cite research that finds China now leads the United States in 57 out of 64 critical technologies as of the 2019–2023 period. This is a sharp rise from the 2003–2007 period, when China led in just three technologies, while the US led in 60.

Autor and Hanson see China's innovation model as formidable: nimble state-private partnerships that reward local officials for advancing strategic industries. The results speak for themselves — BYD in electric vehicles, DJI in drones, CATL in batteries. These are not lumbering state enterprises but "apex predators" emerging from what the authors call "the economic Darwinism that is Chinese industrial policy."

By contrast, the economists characterize America's response under President Trump — blanket tariffs — as pathetically inadequate. From their commentary:

This would have been a lackluster strategy for fighting the trade war America lost 20 years ago. On our current trajectory, we might just get those jobs making tennis sneakers. And if we push things further, we could be assembling iPhones in Texas by 2030, a job so tedious and poorly paid that the satirical newspaper The Onion once memed, “Chinese factory workers fear they may never be replaced with machines.” One thing that tariffs alone will never do is make the United States an attractive place to innovate. Yes, tariffs belong in our trade arsenal — but as precision munitions, not as land mines that maim foes, friends and noncombatants equally.

Of course, Autor and Hanson do offer a plan, one that aims for a third way between what they see as protectionist fantasy and naive openness. Rather than wielding tariffs as blunt instruments against allies, America should forge coalitions, making trade restrictions multilateral and thus more effective. At the same time, the authors advocate inviting Chinese manufacturers to American soil so that foreign competition sharpens domestic players or culls the weak.

What’s more, the duo urges Washington to embrace China's venture-capital approach to strategic sectors — drones, chips, fusion — accepting high failure rates for individual bets while spurring entire industries. But they caution that such planning requires long-term commitment rather than America's trademark policy whiplash. “Choose the battles that we can win (semiconductors) or those we simply cannot afford to lose (rare earths), and make the long-term investments to reach the right outcome. The American political system has the attention span of a squirrel on cocaine.”

A few caveats

Let me walk you, dear readers, through my thinking on the China Shock 2.0 agenda.

A good baseline way of evaluating this proposal might be to start with “A Toolkit of Policies to Promote Innovation,” a 2019 policy review by economists Nicholas Bloom, John Van Reenen and Heidi Williams. These top-notch scholars rank innovation tools based on cost-benefit analysis, quality and conclusiveness of evidence, and impact. Their findings are clear: R&D tax credits, skilled immigration, STEM-focused education, and support for research universities yield the highest returns with the least political distortion.

In contrast, mission-oriented policies directed at specific technological outcomes rank low on evidence and uncertain in pay off. Relatedly, I worry that Autor and Hanson understate the classic interventionist dangers of politicization, rent-seeking, and resource misallocation. In short, trying to out-China China with centralized planning is a high-risk bet.

There’s a strong case to be made that America doesn’t need to beat China at its own game. Instead, it should double down on what works. America's greatest breakthroughs — from the internet to the iPhone to mRNA vaccines — were not products of five-year plans, but emerged from a decentralized public-private ecosystem, open talent pipelines, and plenty of bottom-up competition.

Government action has its place, particularly for funding of basic research (also mentioned in the NYT essay) and taxing unwanted externalities like carbon pollution as way of nudging capital. And there are center-right economists who would be comfortable with employing additional tools where energy abundance or national security stakes are large and private players retains skin in the game.

(This is already happening, for example, in the energy sector where the Department of Energy funds R&D, demonstration, and pilot projects (such as with fusion and advanced geothermal) through programs that require private companies to match federal contributions to some degree and hit specific technical targets before receiving payments. I’m not sure the difference between that and a sprawling Federal Reserve of Innovation of the sort Autor and Hanson are talking about.)

Bottom line: A smart China Shock 2.0 strategy builds on US strengths — and is careful to avoid state capitalism cosplay.

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