A generation of economists trained to believe that trade had little to do with the long decline in high-paying U.S. factory jobs is changing its mind.
[Reposted from Bloomberg | Peter Gosselin | June 18, 2015]
Their findings are likely to fuel the opposition within President Barack Obama’s own Democratic Party to his proposed 12-nation Trans-Pacific Partnership and similar pacts lowering barriers to international commerce.
Because manufacturing employment as a share of the workforce has been dropping for more than 40 years and the same trend has affected other developed nations, including Japan, with far less liberal trade policies than the U.S., many economists had concluded that automation was the primary culprit.
But studies examining the impact of China’s entry to the World Trade Organization in late 2001 have made the case that between 1 million and more than 2 million of the 5 million American factory jobs lost since 2000 are traceable to low-cost imports.
“The ‘aha’ moment,” said Massachusetts Institute of Technology economist David Autor, “was when we traced through the industries in which China had surging exports to the local addresses of their U.S. competitors and saw the powerful correspondence between where China had surged and where U.S. manufacturing employment had collapsed.”
Democrats last week blocked fast-track trade-negotiating authority for Obama, though House Republicans Thursday passed alternative legislation to try to revive it.
‘Millions of Jobs’
Democrats and their allies in organized labor argue that trade deals kill jobs supporting a strong blue-collar middle class without providing offsetting benefits. Senator Sherrod Brown of Ohio said such agreements have “cost millions of jobs.” Senator Elizabeth Warren of Massachusetts said trade accords have “let subsidized manufacturers around the globe sell here in America while good American jobs get shipped overseas.”
Democratic presidential front-runner Hillary Clinton echoed some of these concerns at a campaign stop in Iowa on Sunday without directly opposing trade legislation, saying “there should be no deal” unless terms are improved.
Their Exhibit A has been the North American Free Trade Agreement, which they say caused the exodus of hundreds of thousands of U.S. factory jobs to Mexico. But government statistics show that U.S. manufacturing employment actually rose during the five years after NAFTA took effect in 1994, temporarily reversing the long-term decline. An April 16 study by the nonpartisan Congressional Research Service concluded that NAFTA “did not cause the huge job losses feared by the critics.”
‘Smoking Gun’
China is another matter.
In an April paper, economists Justin Pierce of the Federal Reserve and Peter Schott of Yale University found that the biggest U.S. manufacturing employment declines and largest surges in imports were in products for which China permanently locked in the greatest reductions in tariffs as part of its entry to the WTO. Industries such as apparel, leather goods, plastic plumbing fixtures and surgical and medical equipment sustained substantial hits, they concluded.
“Something big happens” around the time China entered the WTO, Schott said. “In fact, in the industries that were more affected, that’s where you see the job loss occurring.
‘‘That’s the smoking gun for the link with the policy,” he said.
Autor and two co-authors wrote a 2013 paper estimating that between 2000 and 2007 the U.S. lost 982,000 manufacturing jobs because of Chinese import competition.
Job Losses
Autor and his colleagues said imports from China and other countries caused one-quarter of all U.S. manufacturing job losses during the period. He said in an interview that the estimate was conservative and that trade might be responsible for half the impact.
Despite his findings, Autor supports the Pacific-rim trade deal. He co-wrote an op-ed column in The Washington Post saying that the lost factory jobs aren’t coming back and that the deal would help the U.S. in areas such as intellectual property, where it enjoys a competitive advantage. The column said the agreement would also put pressure on China to stop gaming the global trade system.
Before the recent studies, most economists had concluded that something besides trade must be at work in the job losses. They settled on the growing role of automation. They argued that what’s happening in manufacturing in the U.S. and other developed nations is similar to what occurred in agriculture, where industrial techniques allowed farmers to produce much more with a fraction of the workers.
Automation’s Impact
Federal Reserve data back up the critical role of automation in long-run trends: Output per factory worker more than quadrupled from 1970 to 2010, a phenomenon driven by everything from the replacement of people with machines to making work processes more efficient.
As recently as 1980, 1 in 5 American workers was employed in manufacturing; the number today is 1 in 12.
A study by McKinsey & Co. found that before U.S. ports started using cargo containers and massive cranes, a dock worker could move 1.7 tons of cargo per hour. Five years later, the worker could move 30 tons.
Mainstream economists acknowledge that trade has taken a toll on U.S. factory jobs. But they’re skeptical about the dimensions of the new generation’s estimates of its size, as well as its claim of an abrupt change with China’s WTO entry.
They don’t think the new generation gives sufficient weight to the benefits of trade in helping a country make efficiency-improving economic changes and being able to obtain less-expensive products.
‘Slow Growth’
“Trade explains about a fifth of the manufacturing job loss since 2000,” said Robert Lawrence, a Harvard economist and a veteran of the academic and Washington trade debate.
“The rest,” Lawrence said, “is the result of slow growth in consumer spending on manufactured goods and productivity gains” from automation, citing the traditional explanation for what’s causing the decline in U.S. factory employment.
Economists generally defend trade as a way for countries to reallocate their workforces to better and higher uses, a long-term process. And they say that consumers, particularly middle-and lower-income households, benefit immediately from the availability of cheaper imported goods.
A recent study by economists at UCLA and Columbia University concluded that trade increases the real incomes of those in the middle of the economic spectrum by 29 percent while raising it for poor households by 62 percent.
