Accompanying U.S. Treasury Secretary Janet Yellen’s just-concluded trip to China has been an avalanche of stories and punditry about how governments are preparing (or should prepare) for another “China Shock.” Chinese subsidies and industrial overcapacity, so the story goes, threaten to flood world markets with cheap imports of solar panels, EVs, and other products, producing widespread economic carnage in importing countries that’s similar to (if not worse than) what the first China Shock did in the 2000s. Warning against a “China Shock 2.0” was, in fact, one of Yellen’s big messages to the Chinese government, as she repeatedly asserted—including in a Monday press conference—that the United States will not simply sit idly by and let another China Shock happen. 

As we discussed last month, there’s some truth to the current political handwringing about Chinese overcapacity, which is driven by not only misguided industrial policy but also (and probably more so) a weak Chinese economy and depressed consumer demand. However, I’m returning to the issue today because almost every online discussion of China Shock 2.0 (including, alas, at our own Morning Dispatch!) gets major parts of China Shock 1.0 wrong—what it was, what drove it, what it caused, and/or what happened next. 

Reading those summaries, you will inevitably think that 1) the China Shock was driven mainly by U.S. trade liberalization; 2) it devastated the U.S. economy, destroying more 2 million American manufacturing jobs and causing widespread social problems too; and 3) that these widespread harms are settled economic canon. Wanting the government to thwart another round of such devastation today—including via tariffs—would be an understandable response. 

But there’s only one problem: Almost none of what I just said about the China Shock is actually correct.