The Best Kept Secrets About US Trade by Alan Reynolds, Foundation For Economic Education

Half of US Imports Are Inputs for American Manufacturing

William Galston’s Wall Street Journal column, “Why Trade Critics Are Getting Traction,” asks why US employment in manufacturing fell from 17.2 million in December 2000 to 12.3 million last year. He suggests that “import penetration from China [not Mexico] has been responsible for up to 20% of U.S. job losses.”

But “up to” 20 percent explains very little, and that figure is at the high end of a range of estimates from a working paper by Autor, Dorn and Hanson for 1999-2011. They speculate that “had import competition not grown after 1999” then there would have been 10 percent more US manufacturing jobs in 2011.

In that hypothetical sense, “direct import competition [would] amount to 10 percent of the realized job loss” from 1999 to 2011. Since 2007, however, the study’s authors find “a marked slowdown in import expansion following the onset of the global financial crisis, which halted trade growth worldwide.”

Deep recession and weak recovery is what slashed manufacturing jobs since 2007, not imports. In reality, imports always fall in recessions. Although the authors choose to emphasize imports of consumer goods (clothing and furniture), nearly half of US goods imports (47.7 percent last year) are industrial supplies and capital goods, which are essential inputs into expanding US production. That is a big reason why imports rise when US industry expands and fall in slumps.

Even if “up to” 20 percent of manufacturing jobs lost since 2007 could be blamed on imports from China, as Galston claims, that need not mean the overall numbers of US jobs were reduced. “There is no evidence,” writes Galston, “that increased competition from China has produced offsetting employment increases in other industries whose products are traded internationally [emphasis added].”

Confining overall employment effects to “traded goods,” as Autor, Dorn and Hanson do, arbitrarily excludes services — such as financial and legal services, accounting, advertising, travel, telecom and insurance. Services account for 32 percent of US exports, and the United States runs a large and growing services trade surplus with China ($28 billion in 2014) and with the world ($233 billion).

US Trade

US Trade with China

Dollars foreign firms earn by exporting goods to the US are commonly used to import services from the US or to invest in US real and financial assets; both those activities create US jobs. Hollywood, Madison Avenue and Wall Street are big, high-wage US exporters.

Confining the job impact to traded goods also excludes US jobs in transporting, wholesaling and retailing Chinese goods (Walmart, Amazon, etc.), as well as shipping US exports to China and Hong Kong. Incidentally, the US ran a $30.5 billion trade surplus with Hong Kong last year, which isn’t counted as trade with China, though it really is.

Galston acknowledges that “rising productivity” (i.e., output per worker) is “part of the story” about manufacturing jobs. In fact, it is essentially the whole story from 1987 to 2007, when US manufacturing output nearly doubled. The deep recession and slow recovery explain what happened to manufacturing jobs over the past ten years, not foreign trade.

US Trade US Trade
US Trade

Cross-posted from Cato @ Liberty.