Introduction
Many have bemoaned the loss of US manufacturing jobs to foreign lands. The following quote by Mark Riddix is typical:
One of the biggest challenges facing the American economy is that we lack a domestic manufacturing base. Simply put we do not produce anything anymore. We buy tons of foreign goods and then wonder why we are lacking jobs. We import most of our goods which has resulted in a huge trade deficit and industrial job losses. Our economy has transitioned from an agricultural society to an industrial society to a service economy[1].
And recently, Steve Hansen has argued that job losses are associated with the growing US trade deficit. I quote Hansen:
The burr under my saddle is jobs…. Trade deficits export jobs. Some think it is only money on balance sheet – but it is jobs that are exported when a country imports manufactured goods.[2]
Is it correct to associate job losses with the US trade deficit? Should the US worry about losing manufacturing jobs? After all, a growing service sector is a common characteristic of countries with growing per capita incomes. Are the current problems in manufacturing merely cyclical – a direct result of American bankers causing a panic that led to the global recession? Remember that between 1998 and 2007, the US unemployment rate averaged 4.9%. Or are there longer term structural problems at work?
I have looked carefully at recent writings on the subject – many of the claims for why the jobs were lost are way off the mark. It is notable that most of those bemoaning US job losses look at manufacturing as a single industry. It is not. The manufacturing sector is made up of different industries with different dynamics.
What Manufacturing Industries Lost Jobs?
Looking back to 1975, 1978 was the peak year for jobs in manufacturing. Table 1 shows the manufacturing industries with the largest job losses in the 1978-2007 period.[3] .
Table 1. – Job Losses in Manufacturing by Industry, 1978-2007
Source: US Bureau of Labor Statistics
What caused these job losses? In reacting to Steve Hansen’s article, John Lounsbury pointed out:
Now, to be fair, not all the employment decline was due to increased employment overseas. Trade deficits remained fairly benign by 21st century standards. Employment declined significantly because of productivity improvements as more and more automation replaced manual labor.[4]
So let’s look at job-saving automation. In the 1987 to 2007 period, manufacturing value added output has increased by 123% while employment has fallen by 21%. This suggests an overall productivity increase of 181% for the manufacturing sector, and it would have been greater if the data had gone back to 1978. So where in manufacturing were productivity gains greatest? Probably in electronics and computers.
When it comes to textiles and garments, the Chinese are by far the most efficient. Consumers around the world would benefit in lower costs if all garments were made in China. And yet, the US quota on garments from China is the largest trade barrier in the world.
The reason for the job loss in primary metals is because the US makes most of its fabricated metals out of scrap metal. China is now the major global consumer of iron ore. The job losses in the remaining three categories can be attributed largely to productivity gains. But why then did the trade deficit grow? Because of growing US demand for goods and services. Read on.
The US Trade Deficit
Hansen and other associate US manufacturing job losses with a growing trade deficit. Hansen suggests that most jobs resulting from new technologies are being created overseas. Again, let’s look at the trade figures for the different manufacturing industries. Table 2 shows what has happened net to those manufacturing industries whose net trade deficits (imports minus exports) between 1989 and 2007.
Table 2. – Manufacturing Trade Deficit Growth, By Industry, 1989-2007
Source: US International Trade Administration
It appears there is a white elephant in the room: the manufacturing sector with the trade deficit that grew most in this period was oil and gas. This had nothing to do with lower-priced overseas workers and unfair labor practices. It had to do with the growing US dependency on foreign oil. I quote from an earlier piece:
Unlike Japan and China, the US was at one time richly endowed with energy resources. Even today, it is the third leading producer of energy from oil, the second leading producer from coal, the second leading producer of energy from natural gas, and by far the largest producer of nuclear energy. But because of its voracious energy consumption, the US must supplement its own production of energy with imports. It now imports 63% of its crude oil, and this constitutes 21% of all crude oil traded globally. This is an extreme and dangerous dependency.
The European countries and Japan have imposed heavy taxes on motor vehicle fuels so gas prices have been in the $6-$7 range for more than a decade. But the US government policy has been to keep the gas price as low as possible. The result? Per capita, the US consumes almost four times as much oil as the other OECD countries. Is there a US energy policy?
Why does the US import so much oil? Because at existing exchange rates, extraction and shipping oil from overseas is less costly than US extraction. And US extraction costs will continue to climb.
I have written numerous pieces on purchases of US government securities by China and the Japanese to promote their exports. Together, these two countries hold more US Treasury debt ($1.8 trillion) than the Fed ($1.2 trillion). There is no question that this propping up of the US dollar has contributed significantly to US manufacturing job losses.
All of this is not to say American jobs have not been lost to overseas competition. But what more should be done? I have already mentioned the China garment quota – the largest trade barrier in the world. US agricultural subsidies range between $10 and 30 billion annually. More pressure on the Chinese and Japanese to strengthen their currencies?
Conclusion
With all the Japanese efforts to keep the Yen from getting stronger, the dollar has lost 60% of its value against the Yen since 1978. And they still export excellent cars to the US at competitive prices. At some point, Americans have to understand that people in other countries are willing to work harder for less. And if that continues, Americans’ real incomes will fall further. It is called global competition.
[1] http://seekingalpha.com/article/119136-u-s-needs-to-return-to-its-manufacturing-base [2] http://econintersect.com/b2evolution/blog2.php/2011/01/21/usa-trade-deficit-exports-1-3-million-jobs. [3] I look only to 2007 because I do not want to confuse the findings with cyclical job losses resulting from the global recession. [4] http://econintersect.com/wordpress/?p=5769Comments
kenezen
You have a good article. But it looks to me you had a goal or outcome you stretched to reach. It was laudable. I’m on the other hand a simple business guy. I stood on the banks of the river as a child and watched magnificent waves of black smoke and fire belch out of a steel mill across the river. It’s no longer there. I watched steel, rubber and plastics mass production leave America first for wage and distribution. And stay away as wages evened out to be kept out by EPA requirements and federal Agency harassment. If you can find the guys that were running the plants and now retired they’ll tell you off the record.
Another two small things that makes my point. Manufacturing job percentages of working population are at historic lows. From 60’s compared to now results are: 44%-47% in the 60’s as compared to 6% now. And shamefully they now sneak in assembly just to get to 6%!
So thank you for the good article. The results of these losses are very easy to see. Our middle class is at its lowest percentage of population in history. Federal workers make Double in wage and pension than the Private sector worker (USA Today Bureau of Economic Analysis 2009 and it’s worse now) Just recently, Last five years), Mexico is getting GE, Honeywell,Goodrich, Cessna and GM plus others. Plus, the support industries that goes along with it. Their government likes Industry.
skye
I love the articles on this site, excellent!
K. C. Mosier II
From 1968 to 1996, I was a sales manager/ president/CEO of a family-owned industrial manufacturing company that specialized in pneumatic cylinders and valves. It is my belief that the flight of manufacturing from America was orchestrated by NAM (National Association of Manufacturers). Without NAM’s encouragement and guidance, I can see NO other way that a robust American manufacturing industry could have shrunk so far so fast. I am interested in your thoughts?
william alford
This country is right at this time in history, FEB 2016, gearing up to elect a new President. It is my hope that when the new president gets elected he will assume the position of getting rid of the leaches on capitol hill who are poisoning the well with their bribes to the electorate. This country could still be self sufficient if the politicians had not gotten so greedy and corrupt! We could also still have good trade with the rest of the world. Globalization is merely a name for the corrupt ones to assimilate to when asked what is going on. Inflation would not grow at the unsustainable rate that it is growing now!
Thurque
The comments are all predicated on the GOOD OL’ DAYS. Those days are over. The USA, as is the rest of the world, is changing. You must know your past to understand your future. That is to say, “WE” as a country and world have been through this transition before. It was called, “The Industrial Revolution”. And the landowners pose arguments just like these prior comments. But the actual facts are, change has situations and circumstances and highs and lows. Life does not stand still, not does man. Either broaden your education and stay ahead of at least with the curve, or become one of many stories that when told only shows you don’t have a clue.
That’s it, that’s all!
Tom Snyder
GDP growth is twice less than what it was since NAFTA and the WTO started in 1994 and 1995, and median income is flat or down, while millions more are out of work (the non-participation rate) and on welfare. So, explain to me again how “free trade” works. . .