The Decline of Manufacturing in the U.S. Economy: Impacts of China's Trade Shockk, Trump's Protectionist Tariffs, and the Drivers of Manufacturing Job Losses (Presentation Slides)

Abstract

The long-term declining role of manufacturing in the U.S. economy – reflecting a shift of the economy after World War II to a post-industrial orientation with an increased emphasis on services – was accelerated by the effects on manufacturing jobs and trade deficits of President Reagan’s budget deficits in the 1980s and China’s recent trade penetration. Similarities of Reagan’s policies to President Trump’s proposed protectionist tariffs and the cross-border corporate tax reform advocated by House Republicans in February 2017 suggest a possible partial reversal of the long-term job decline, but the ensuing major dislocations in jobs are unlikely to lead to a net increase in manufacturing jobs. The magnitude and fast pace of China’s import penetration, coupled with anemic demand for domestic goods and high productivity gains in American factories, are associated with the 33 percent decline of 5.7 million domestic manufacturing jobs in the 2000-10 period – the largest loss in a decade in U.S. history. The effects on manufacturing employment associated with trade, domestic demand, and productivity strongly suggest that the largest impact – accounting for over 85 percent of total manufacturing jobs lost in the 2000s – is attributable to technological advances in U.S. factories sustaining productivity gains, with trade a relatively minor contributory factor, when viewed from the long-term perspective. The superior productivity gains, as well as the vaunted growth in real value-added output, associated with manufacturing are driven by the performance of its computer and electronic products industry, representing only 13 percent of total manufacturing value added. China’s trade competition challenged the prevalent assumption, based on bilateral trade pacts after World War II, suggesting that economies recover from ‘trade shocks’ by displaced workers shifting into higher-productivity export industries. Free trade agreements and China’s trade penetration – with the benefits not evenly distributed in the U.S. – are associated with the geographically-concentrated and unexpected political results of the November 2016 elections.