China Shock, Populism and FDI Mismatches

• In Event: FDI and Domestic Politics

Abstract

Recent studies have shown that globalization and China's emergence as a manufacturing center have led to deindustrialization and significant job losses in advanced democracies. This trend is often linked to the growing far-right political support. However, it is important to note that foreign direct investment (FDI) into these nations has also generated millions of jobs. We argue that the 'China shock' alone does not fully account for the rise in far-right support in these democracies. A key factor is the geographical mismatch in FDI allocations within these countries. Using county-level data on US FDI inflows, we find that the intensity of the China shock in counties had not been correlated with the level of FDI they received. Moreover, our results show that reduced FDI inflows significantly increased the vote share of the Republican candidate, Donald Trump, in the 2016 presidential election in these hard-hit counties. Therefore, the geographical distribution of FDI is a key factor in understanding local political responses to the China trade shock.

Authors

• Byung Koo Kim, KDI School of Public Policy and Management

• Seungjun Kim, KDI School of Public Policy and Management

• Jong Hee Park, Seoul National University