All of our manufacturing jobs are going to China!…or are they?
“[China’s] an economic enemy, because they have taken advantage of us like nobody in history. They have; it's the greatest theft in the history of the world what they've done to the United States. They've taken our jobs.”
—President Trump, Good Morning America, 2015
Manufacturing is hurting in America, there is little doubt about that--the manufacturing sector’s share of employment in the US economy has dropped from 33% to just 8% over the last 70 years. US manufacturers have been losing, and they have every right to be worried, upset, and even angry. But at whom--or what--should they be angry?
There are some who believe that openness to trade, despite all its benefits, creates “losers”—collateral damage. Because it is cheaper to produce certain goods abroad, domestic producers of these goods, it is said, lose their competitive advantage, and eventually, their jobs.
To whom have they lost their jobs? Many, including President Trump, tell us to blame China as a major factor in the demise of the manufacturing sector. The rhetoric goes something like this: American manufacturing is losing to China because of low wages for Chinese workers and cheaper overall production costs. These, combined with declining freight and transportation costs, yield economic benefits when producing goods through an international supply chain. Trump made this a core issue in 2016, promising to keep China from “ripping us off” any more than they already have. He has promised to bring back manufacturing jobs to America.
But perhaps there are no jobs to be brought back.
While manufacturing employment has consistently declined over the most recent decades, the US has actually consistently produced the same percentage of manufactured goods as a percentage of our total output (roughly 11% over the last 60 years). Not only this, but manufacturing wages have increased by 6% (adjusted for inflation) over the last 20 years.
What does this mean? The United States is still producing the same ratio of manufactured goods today as it was 60 years ago, with little decline, while paying manufacturing employees more. The US, at least for now, still plays a considerable role on the world stage when it comes to manufacturing, even as China’s role has grown.
So if we are still producing the same ratio of manufactured goods as a percentage of our overall output, why has there been such a steep decline in employment? There could be any number of factors, but there is one that is particularly obvious: an increase in US manufacturing productivity. Over the last four decades, the US manufacturing industry has greatly increased its productivity (measured as output/worker), averaging around 2.7% growth per decade over this period. What has led to this productivity increase? Advances in technology, improved infrastructure, the list goes on. But while China has clearly increased its presence on the world stage as a global manufacturer, US workers should hold off on blaming China through support of a trade war.
And no one can deny the massive benefits the US and other countries have enjoyed from an openness to trade over the last century. As countries began to open up trade with other countries first in the 1950s and then again in the late 1970s, they soon realized that the revenue made from tariffs was only a fraction of the growth in GDP and revenue from opening up to the rest of the world. This openness to the global economy has been essential in enabling many emerging economies to develop competitive advantages in the manufacturing of certain products (Matusz and Tarr). In these countries, defined by the World Bank as the "new globalizers," the number of people in absolute poverty declined by over 120 million (14 percent) between 1993 and 1998 (World Bank). On average, those developing countries that lowered tariffs sharply in the 1980s grew more quickly in the 1990s than those that did not (David Dollar).
Trade liberalization creates competition, incentivizes ingenuity and innovation, and lowers prices for all. It reduces the risk of monopolies. And, at least in this example, it cannot be blamed for the decline in employment in the manufacturing industry over the last several decades. So before we continue on with this trade war by raising tariffs that will likely be paid for by the American consumer through higher prices for the goods they enjoy, let us first pause to examine the facts of the manufacturing industry in America. Yes, American manufacturers are losing their jobs—but it’s unlikely Trump’s trade war will do anything about it, and blaming foreign economies appears to cause more problems than it solves.
Dani Rodrik (2018), Populism and the economics of globalization, Journal of International Business Policy. https://drodrik.scholar.harvard.edu/files/dani-rodrik/files/populism_and_the_economics_of_globalization.pdf.
David Dollar, "Globalization, Inequality, and Poverty since 1980", World Bank mimeo, 2001.
DeLong, J. Bradford and Lawrence H. Summers. 2012. “Fiscal Policy in a Depressed Economy.” Brookings Papers on Economic Activity (Spring): 233â€“97. www.brookings.edu/wp-content/ uploads/2012/03/2012a_delong.pdf.
Steven Matusz and David Tarr, "Adjusting to Trade Policy Reform", World Bank Policy Research Working Paper No. 2142, July 1999.
World Bank, Globalization, Growth, and Poverty: Facts, Fears, and an Agenda for Action, forthcoming.