The US financial bubble was also fueled by imports

Globalization played a part in fueling the credit bubble that led to the Great Recession. It's one of the themes of Import Competition and Household Debt, a paper by Julien Sauvagnat, Assistant Professor at the Department of Finance, with Jean-Noël Barrot, Erik Loualiche, and Matthew Plosser. The research builds a bridge between the literature on the displacement effects of international trade, in particular from China to the U.S., and the literature on the rise in household debt in the years preceding the Great Recession, from 2000 to 2007.

"We know from previous research that competition from China had an adverse effect on local labor markets. We have shown that US workers who have lost their job have increased their debt in order to maintain their living standards. This may explain at least part of the increase in household debt before the crisis". To test the hypothesis that the displacement of domestic production by imports fueled demand for credit in some areas, they analyzed individual-level data on debt and mortgages defaults in all 3,000 US counties. They used industry-level shipping costs to capture local exposure to import competition.

They found out that the highest increase in household debt before the crisis occurred in counties with industries that were more exposed to import competition from China. "The exposure explains 30% of the cross-regional variation between counties in household debt growth from 2000 to 2007. Most of the effect is driven by mortgage debt. Now, we would like to find data on people's expectations to see if the income shock was perceived as transitory or permanent".

Read other articles on the topic:
Who wins and who loses in the game, not at all new, of Globalization
When Chinese competition endangers health. A study by Jèrome Adda
Europe's malaise has origins in Beijing. A study by Italo Colantone and Piero Stanig
The sense of fear is not enough to explain the new populisms. A study by Massimo Morelli