Trade Is Not the Driver of Major Job Loss
Trade wars, encouraged by President Trump, are inching closer. The White House has rejected the Trans-Pacific Partnership (TPP), an agreement involving 12 Asian-Pacific countries, including the United States, Japan, Malaysia and Vietnam. It is threatening to do the same with the North American Free Trade Agreement (NAFTA) by slapping a 20% duty on Mexican exports to the United States. All this is advanced in the name of bolstering U.S. manufacturing jobs, which are regarded as being sacrificed to imports and "unfair" foreign trade.
There's only one problem: It isn't true.
Contrary to popular opinion, trade is not a major cause of job loss. It's true that U.S. manufacturing has suffered a dramatic long-term employment erosion, sliding from roughly one-third of nonfarm jobs in 1950 to a quarter of jobs in the early 1970s to a little less than 9% now, according to economist Bradford DeLong of the University of California at Berkeley in an essay posted on Vox. But the main cause is automation.
Note that manufacturing's decline began in the 1950s and '60s, well before the onset of annual trade deficits. In these years, we ran trade surpluses as Europe and Japan recovered from World War II. The first postwar U.S. trade deficit occurred in 1971. But since then, haven't we been hurt by our trading partners' predatory trade policies and "offshoring" by U.S. multinationals?
You can be excused if you answer "yes." We are constantly bombarded with images of shuttered factories and the message, implicit or explicit, that these plants closed because they couldn't compete with imports. This happens. It's not a myth. But the effect is overstated. We've lost perspective.
In his essay, economist DeLong makes a novel argument to demonstrate that automation and new technologies are the biggest causes of job destruction. Suppose, he says, we examine Germany, the world's powerhouse exporter. It seems to have done everything right. It has first-rate workers and engineers; it benefits from a weak euro (which make its exports cheaper); it has routine trade surpluses. If any country should have maintained its share of manufacturing jobs, it should be Germany.
It hasn't. Instead, says DeLong, "it has seen the same pattern as the U.S." — that is, a steady decline of manufacturing jobs as a share of the total. From 1971 to 2012, German manufacturing employment fell from about 40% of the total to roughly 20%. About one-third of the decline reflected the closing of wildly inefficient factories in the former East Germany, but the rest reflected the normal "shedding" of workers at less efficient firms. Fewer workers were "needed to make each car, each refrigerator, each chair" than in the past. That's true for the United States as well.
This suggests that President Trump, though he may achieve some high-visibility victories in preventing large firms from moving factories abroad, will struggle to influence overall job trends. About 98% of the 252,000 U.S. manufacturing firms have fewer than 500 workers, reports the National Association of Manufacturers. These firms will do whatever they can to improve competitiveness. Since 1950, DeLong says, only 5% or less of manufacturers' job losses reflect trade agreements, including China's entry into the World Trade Organization.
So what did Trump get by killing TPP? Most economic analyses suggest that TPP would give its member countries a slight boost in economic growth by lowering tariffs and streamlining regulations. By 2030, U.S. incomes would be 0.5% higher and incomes in Vietnam — a big winner — would be 8% higher, estimates a study for the Peterson Institute. That modest boost is gone.
"But the real benefit of TPP went beyond trade," says economist Russell Green of Rice University, "it was about leadership in Asia." A trading alliance led by the United States would provide a counterweight to China's influence. The opposite has happened, says Green. Leaders in the other 11 countries made difficult political decisions to ensure the TPP negotiations succeed. By "throwing it in the trash," Trump has earned their distrust.
Will TPP's collapse foster a new trading system built around China, not the United States? Will Trump's abdication of leadership of an open and rules-based system inevitably lead to more trade conflicts, as countries adopt protection and mercantilist policies (tariffs, export subsidies and preferences for domestic goods)?
We don't know, but the prospects today are greater than yesterday. Already, some disappointed TPP countries are indicating interest in strengthening ties with China, says Jeffrey Schott, a trade expert at the Peterson Institute. He puts Australia, Canada, Chile, Peru and New Zealand in this group.
So what Trump gets from his trade crusade is a (false) rallying cry for more U.S. jobs. What the United States gets, if anything, is less clear.