America’s debate about trade deficits and tariffs has reached a fever pitch. On the one hand, the White House argues that US trade deficits are a sign of unfair competition by other countries and promises a manufacturing renaissance with well-paying jobs through aggressive tariff policies. On the other hand, critics claim that these tariffs will simply lead to higher prices. What’s often overlooked in this heated exchange is that tariffs affect not just manufacturing but also service-sector jobs—where most Americans work.

To understand these effects, it is useful to revisit the most significant trade disruption in recent history: China’s emergence as a manufacturing powerhouse during the 2000s. This so-called China Shock is widely regarded as an important reason for the decline in US manufacturing employment. Yet job creation in manufacturing from new and expanding firms remained substantial throughout the 2000s, and employment shifted significantly toward services as American firms and consumers benefited from access to cheaper manufactured goods from China.

Our research investigates the extent to which the opposing trends in manufacturing and services job growth are related. Our findings reveal that local labor markets more exposed to Chinese import competition experienced larger manufacturing job losses. But these losses were offset by stronger services job growth, which mostly came from job reallocation within firms. Importantly, the extent of this reallocation varied across regions. Places with a high share of college-educated workers—including much of the West Coast and large cities—saw successful transitions, with service job gains outpacing manufacturing job losses. Places with a low share of college-educated workers and high manufacturing dependence—including much of the Midwest and the South—experienced only limited services growth to compensate for manufacturing job losses.

Our findings imply that the China Shock was, on net, a job creator and not a job killer. At the same time, the shock created winners and losers, not just across workers but also across regions, by relocating jobs from the industrial heartland to the coasts and large cities, thereby contributing to the changing geography of jobs in the United States. This experience offers a crucial lesson about today’s debate on tariffs: While trade barriers might bring back some manufacturing jobs, they may not only raise prices but also risk undermining the substantial growth in high-paying service-sector jobs that global trade has fostered, especially in high-education and high-productivity regions. In other words, the aggressive tariff policy advocated by the White House may create a few winners but will likely make America lose overall.

Our analysis is based on detailed administrative data on all US firms and their establishments from the Longitudinal Business Database of the US Census Bureau. This database allows us to provide a detailed account of how the local reallocation of jobs away from manufacturing to services occurred. Our findings show that firms shifted from manufacturing toward services by closing manufacturing plants and expanding employment in services (though not always in the same local labor market) or by switching their plants’ primary activity from manufacturing to the provision of trade-related services, such as management, research and development, and wholesale. Establishments switching from manufacturing to services accounted for 40 percent of the total negative effect of the China Shock on manufacturing employment from 1997 to 2007. This implies that what appears to be manufacturing job loss in more aggregated, public-use data can be attributed partly to jobs now counted as service-sector rather than manufacturing employment. Establishments that switched industries tended to reduce employment, but they did not destroy all jobs.

The effects of the China Shock on jobs differ from aggregate trends. After breaking down the sources of job creation and destruction in aggregate US data, our findings reveal that about two-thirds of the overall decline in manufacturing employment from 1997 to 2007 came from firms closing for any reason, China-related or otherwise. In contrast, firm closures accounted for only 25 percent of manufacturing job losses from the China Shock—the rest were mostly due to firms downsizing and plants switching from manufacturing to services. Existing firms that created service jobs account for nearly all the overall job growth in services from 1997 to 2007. But job growth from newly created firms and establishments accounts for 25 percent of the growth in service jobs attributable to the China Shock—the rest came from existing firms.

Our findings provide more evidence that the China Shock was not the only driver of increased manufacturing plant closures during the 2000s. Rather, the findings suggest that manufacturing job losses and service-sector gains do not conform to some of the broader patterns and anecdotes in common narratives. Additionally, the findings suggest that the China Shock promoted the entry of new service establishments, which is consistent with evidence of the rise of goods producers that do not use factories and that focus on marketing, research, design, and logistics.

Our analysis also reveals that the local labor market effects of Chinese import competition varied substantially by employer characteristics. The increase in service jobs at firms that own manufacturing plants accounts for most of the decline in manufacturing jobs. This suggests these gains in service-sector jobs were from some combination of designing, manufacturing, servicing, or perhaps marketing products made more cheaply abroad. In contrast, only about a quarter of the gains in service jobs came from establishments belonging to firms that reduced employment in manufacturing. Furthermore, about three-quarters of the gains in service jobs came from establishments belonging to firms with more than 1,000 employees, suggesting much of this job growth arose in larger multinational firms. Nearly all the increase in service jobs came from establishments that pay high wages relative to their industry.

Finally, reallocation within firms from manufacturing to service jobs in response to Chinese import competition occurred primarily on the West Coast and in large cities, areas with a high share of college-educated workers. Establishments switching industries from manufacturing to trade-supporting services are almost entirely confined to these high-education areas, accounting for half the negative effect of the China Shock on manufacturing jobs. The rest was due to firms shutting down manufacturing plants and expanding or opening new service establishments. The resulting increase in service jobs more than made up for the decrease in manufacturing jobs, thus increasing total employment. By contrast, in the Midwest and the South—areas with a lower share of college-educated workers and high initial manufacturing dependence—manufacturing job losses due to the China Shock were primarily driven by firms closing and plants only modestly expanding service jobs after experiencing job losses. In summary, firms in higher-educated parts of the country reduced manufacturing employment but more than made up for it with growing management, design, and marketing employment. In lower-educated parts of the country, there was far less offsetting growth in nonmanufacturing employment.

Ultimately, the China Shock led to a significant decline in manufacturing jobs in the United States, amplifying trends in manufacturing job losses while the service sector made gains. But the contrast between service and manufacturing represents two sides of the same coin. Part of the higher rate of job losses attributable to the China Shock was from establishments that continued operations but switched their primary activity from manufacturing to services. This suggests that some manufacturing jobs did not disappear but eventually became service jobs. This factor, combined with job creation at other new and existing service firms, meant that total employment increased in some parts of the country. Lastly, the gains in service-sector employment growth from the China Shock were not evenly distributed across regions. Regions with a small share of the college-educated population and more dependent on manufacturing did not experience offsetting gains in services like the rest of the country. This regional disparity in adaptation to trade shocks is clearly an important issue that deserves our attention. However, it is unclear to what extent tariffs will bring back manufacturing jobs in these regions, and these tariffs may exert a high cost on the rest of the country in the form of higher prices and lower overall job growth.

Note
This research brief is based on Nicholas Bloom et al., “The China Shock Revisited: Job Reallocation and Industry Switching in US Labor Markets,” National Bureau of Economic Research Working Paper no. 33098, November 2024.