Who will save China's rust belt? By Scott Sumner

Now that Trump has decided to save America’s rust belt, I thought it would be interesting to look at the issues facing China’s rust belt. Here is the Financial Times:

North-eastern China is facing a demographic crisis as educated millennials abandon the industrial heartland, the country’s worst-performing region. Planning officials revealed this month that the economy of Liaoning, one of the three northeastern provinces, had shrunk 2.2 per cent in the first nine months of the year — the largest regional contraction in China in seven years. , , , For younger workers, the slowdown is made worse by the region’s extreme reliance on the state. Most new jobs in China are created in private companies but north-eastern China is home to the state-backed heavy industrial companies and state-owned farms that form the Communist party’s traditional support base. In some cities, new jobs in government or state-owned enterprises only open when an older worker leaves, leading to a practice whereby parents or other family members will retire to create a slot for a younger relative. In the 1990s, China’s three north-eastern provinces saw net immigration of 360,000 people, but from 2000 to 2010, 2m left. . . . China’s 2010 census showed that the fertility rate of the north-east had dropped to only 0.75, too low to replace an ageing labour pool. More recent mid-cycle census data from 2015 has not yet been released, but is likely to show a further decline.

If that 0.75 fertility rate is accurate, it would be by far the world’s lowest rate, for any large region.

Before fixing the problem, let’s think about possible causes:

1. Trade: Many people claim America’s rust belt has been devastated by imports. But China is the world’s largest exporter of goods. It’s also the world’s largest exporter of steel. So trade does not seem to be the culprit.

2. Environmental regulations: But China has relative weak environmental controls, so that doesn’t seem to be the problem either.

3. Neoliberalism: This region is the most state dominated in China, so neoliberalism doesn’t seem to be the problem.

4. Declining output: China’s steel output has soared in recent decades, rising to roughly 50% of global output:

My conclusion? It seems like the “problem” is automation. China’s manufacturing productivity is soaring, and that means that even producing 50% of the world’s steel is no longer enough to keep a rust belt prosperous. In China, it is the free market, high tech cities like Shenzhen and Hangzhou that are booming.

How does this apply to the US? First, our steel output is down about 20% since 1970, even as consumption edged up slightly:

So is that why steel employment has fallen? No, it’s mostly productivity. Steel employment is not down 20%; it’s down closer to 80%:

Are there any lessons here for America? I think there are. People trying to save the rust belt are essentially Luddites. The only way to save those old industrial jobs is though restrictions on productivity growth. Sorry, but there is no other way.

You might think this is all common knowledge among economists. It’s not. Every day I read economists talk about how trade has devastated America’s rust belt. Nope, it’s the productivity, stupid.