Economists have long asserted that free trade with other countries helps everybody, and for decades, politicians in both the Democratic and Republican parties have pretty much toed that line.
But Donald Trump and Bernie Sanders did not. Both predicated much of their presidential campaign rhetoric on the belief that “free trade” was in fact a raw deal for most working-class Americans.
It was a message that resonated with millions and seemed to have caught both parties off guard.
The basic precept for trade, ongoing well before this country became a country, is not that complicated. There are things made in other countries that we want to buy, and there are things made here in the United States that people in other countries want to buy.
But the facts and figures concerning trade and the state of U.S. manufacturing is where it becomes thorny. Divergent views are often based on the ideological predispositions of those interpreting the facts, which should come as no surprise.
I got a kick out of those who were predicting a few years ago a manufacturing “renaissance” for the U.S. powered by technological advances and lower production costs relative to our trading partners. Yes, there have been instances of reshoring, but just as much offshoring has also been occurring.
This much we do know — trade touches everyone’s lives, whether they know it or not. Consumers benefit with lower prices, and a greater variety of goods. Certain companies benefit by realizing greater profits, while highly-educated workers in this country benefit by being more in demand.
A Disruptive Force
Much of the debate over U.S. manufacturing concerns whether the massive and historic manufacturing job losses in the 2000s were because of trade or automation. Most defenders of free trade put the onus of job loss on automation.
But more and more, economists are now starting to realize, albeit slower than many production workers in factories, that trade can be disruptive force to an economy. That aspect was addressed on Friday by Commerce Secretary Wilbur Ross soon after being confirmed.
“We’ll be aggressive on trade because we know that deals that have been made historically have resulted in the great loss of manufacturing jobs, a great amount of closed manufacturing businesses,” the billionaire venture capitalist told CNBC. “We don’t want that to continue.”
A report last month from the Information Technology and Innovation Foundation (ITIF) found that despite the prevailing narrative that automation was the main culprit behind the loss of more than 5 million manufacturing jobs from 2000 to 2010, trade pressure and faltering U.S. competitiveness were in fact responsible for more than half of those job losses.
The China Effect
Will Kimball and Robert Scott with the Economic Policy Institute estimated in a 2014 report that 55 percent of manufacturing job losses between 2001 and 2013, 2.4 million, were due to the rising trade deficit with China. ITIF has estimated that 67 percent of the manufacturing jobs that disappeared in the 2000s have been due to trade, which includes the China effect.
That coincides closely with the findings of a 2013 paper by David H. Autor, an economist with the Massachusetts Institute of Technology (MIT), who found that Chinese import competition accounted for 55 percent of the loss of U.S. manufacturing jobs between 2000 and 2007.
To be sure, the automation of manufacturing processes contributed to the job losses, but with China displacing the U.S. as the largest manufacturing nation in 2010 and becoming the world’s dominant export power, U.S. manufacturing workers were hit more quickly.
Winners and Losers
“Trade almost necessarily grows the size of the economic pie, but it also changes the size of different slices. It’s quite possible for trade to increase the size of the pie by a few percent, and yet shrink some slices by 20 to 30 percent,” Autor said in an interview with The Washington Post last month.
“Because we’re a high-skill nation, when we trade with the rest of the world, we increase our production of skill-intensive products. So trade tends to increase the earnings of highly educated and skilled workers, and decrease the earnings and employment opportunities for less educated and less skilled workers.”
The fact that there are winners and losers from trade may make imminent sense, although U.S. policymakers have historically seemed to turn a blind eye.
Like a Bomb
In reality, we have seen in most visible and gut-wrenching terms that trade can dramatically reduce the livelihoods of a subset of people.
“One reason is that manufacturing is geographically concentrated, so when a sector starts to go into decline, everyone in a region loses their job simultaneously, just like what happened with coal mining,” said Autor. “It’s like a small bomb going off in your downtown.”
And while we know that the digitization of manufacturing is now underway, requiring a higher level of skills from workers, we also know that manufacturing historically has been a sort of refuge, offering high-paid work for millions of relatively less-educated workers. They earn more per hour and are generally not going to find equally good jobs.
The Missing Men
During this current disruptive period as the labor market has become more skill intensive, women have been more adaptive than men.
“No one spends a lot of time shedding tears about the loss of all those great clerical jobs, but it is the case that clerical jobs have dramatically contracted. Women have moved on and up,” Autor said.
“Whereas for men in manufacturing, there has not been nearly as strong of an educational response. When men are displaced from manufacturing, they tend to move into lower paid jobs, or just move out of the labor market. So they really are losing something they’re not going to replace in any short-term way.”
I touched on this phenomenon in a past blog entitled The Missing Men. Consider that more than a fifth of American men — about 20 million — between 20 and 65 had no paid work last year.
Autor and a growing number of economists are now concluding that the shock of China’s entry into global manufacturing was unprecedented in the disruption it created for U.S. communities. It created much more hardship than anyone could have predicted.
Things We Can Do
So what is the answer? Putting the genie back in the bottle and expecting to get back a lot of labor-intensive manufacturing is highly unlikely, because relative to the much of the world, the U.S. remains a high-wage country.
Still, U.S. manufacturing costs are lower than in Germany, Japan, and the United Kingdom, and are almost on par with Korea. That said, U.S. companies pay among the highest effective corporate taxes in the industrialized world. That can be fixed as I advocated in my past blog, The Big Business Story to Come.
And the U.S. can aggressively enforce existing trade agreements and negotiate new ones. We can and should turn to the World Trade Organization when other countries engage in dumping, flooding the market with their products and bankrupting their competitors.
The ITIF recommends the Trump administration needs to expand, not eliminate, funding for programs like the Manufacturing Extension Partnership program at the National Institute of Standards and Technology, the Manufacturing USA program, the newly enacted Manufacturing Universities program, the Ex-Im Bank, and skills-training programs for manufacturing workers.
While manufacturing may never be the mass employer it once was, it remains incredibly important to our country because so many of our great ideas come from making new products. As such, much of our wealth is drawn from innovation rooted in manufacturing. May it remain so.
I’ll see you down the road.
Dean Barber is the president/CEO of Barber Business Advisors, LLC, a location advisory and economic development consulting firm based in Dallas. BBA helps companies and communities. Mr. Barber is available as a keynotes speaker and can be reached at email@example.com or at 972-890-3733.