It is difficult to convince people that trade is not stealing American jobs, even with the unemployment rate now at 3.9%, which is less than half of the rate in the Eurozone (which has a massive trade surplus.) Some pundits have pointed out that manufacturing output keeps hitting new highs, and that the actual problem is automation—we are able to produce more goods with fewer workers.
A new article over at Quartz challenges this view, pointing out that much of the growth in manufacturing was concentrated in the computer sector, where productivity growth was extremely rapid. Other sectors were much more sluggish. That may be true, but trade doesn’t really account for the huge drop in manufacturing employment since 2000:
Between 2000 and 2010, manufacturing employment plummeted by more than a third. Nearly 6 million American factory workers lost their jobs. The drop was unprecedented–worse than any decade in US manufacturing history. Even during the Great Depression, factory jobs shrunk by only 31%, according to a Information Technology & Innovation Foundation report. Though the sector recovered slightly since then, America’s manufacturing workforce is still more than 26% smaller than it was in 2000.
Between 2000 and 2016, imports edged up from 14.3% of GDP to 14.7% of GDP. But exports rose even faster, from 10.7% of GDP to 11.9% of GDP. As a result, the current account deficit actually got smaller, falling from about 4% of GDP to roughly 2.5% of GDP:
So why the perception that trade is the problem? Perhaps trade has interacted with automation. Thus trade allows the US to specialize in producing more capital intensive goods, and import more labor intensive goods. If we import more shoes and clothing and furniture and autos and export more corn and chemicals and computers and aircraft, then the trade balance may not be affected, but there may be a loss of jobs in specific regions that are impacted by trade with China and Germany and Mexico.
The Quartz article also argues that trade played a big role in the political success of Donald Trump. That seems a bit of a stretch. Trump won easily in the farm belt, a region that has has massively benefited from trade, and would be hurt by protectionism. The same applies to coal mining areas. He also carried Mission Viejo (California) where I currently live—another area that hugely benefits from trade. While trade was an issue in certain areas, if people voted on the basis of how they benefit from international trade, then Trump would have lost in a landslide.
Obviously there are specific areas where trade has reduced employment, and Trump may have benefited in those regions. But protectionism is not particularly popular in America, partly because the vast majority of Americans benefit from trade. If a politician wants to run as a “populist”, they ought to favor trade.
HT: Cyril Morong
READER COMMENTS
Mark Bahner
May 5 2018 at 5:32pm
The thing that always strikes me is that Trump overwhelmingly won in rural areas and Clinton overwhelmingly won in cities.
It happened in Washington, Oregon, California, Virginia, Michigan, Illinois, North Carolina, South Carolina, Georgia, etc. etc. Donald Trump even won in Northeast and Northwest CT, which are the most rural sections of the state.
It’s amazing to me that a guy like Donald Trump–essentially the ultimate “big city” person–could ever sell himself as a rural person’s candidate. To me, it’s the greatest political sales job of all time.
County by county 2018 election map
Gordon
May 5 2018 at 8:28pm
What’s also silly about the article in Quartz is that much of the absolute job loss in manufacturing it cites occurred during the recessions of 2001 and 2008. Nor does it address the steady decline since the 1950s in the percentage of jobs in manufacturing.
Kenneth Duda
May 6 2018 at 7:00am
As to your question “so why the perception that trade is the problem?”, I think the answer is simple. It’s because we have a trade *deficit*. A deficit means you’re losing money. It means you’re getting poorer while wily foreign adversaries are getting richer at your expense. It means you’re being taken advantage of by bad trade deals made by weak-kneed liberals.
If you want to know why people think wrong thing X, just listen to what Trump is saying about X, and you’ll have your answer.
In fact, a persistent current account deficit is good, because it means you have a capital account surplus (as a matter of accounting), which happens when your foreign investments out-earn foreign investment into your country. You are essentially forcing foreigners to work for you through better investing skills. Since they can only do that in tradable sectors, you wind up with less local employment in tradable sectors and more in untradable sectors.
In fairness, I did not immediately understand this. And the media does not help. If every news report of ballooning trade deficits reminded us why this is a good thing overall (albeit not so much for employees and owners of firms in tradable sectors), that would really be nice.
Jon Murphy
May 6 2018 at 8:07am
@Kenneth Duda
As to your question “so why the perception that trade is the problem?”, I think the answer is simple. It’s because we have a trade *deficit*. A deficit means you’re losing money. It means you’re getting poorer while wily foreign adversaries are getting richer at your expense. It means you’re being taken advantage of by bad trade deals…
I must object. This is incorrect. Trade deficits do not mean, or imply, anyone is losing money. Trade deficits do not mean or imply that foreigners are becoming wealthier at domestic expense (indeed, if the Chinese are manipulating the currency and subsidizing their industries to fuel exports, then they are becoming poorer and the US wealthier since they can now buy fewer items at higher prices whereas the US can buy more items at lower prices). Trade deficits cannot mean we are losing money because, as you rightfully point out in your final paragraph, that money comes back to the US in the form of investment.
You may argue the perception is that trade deficits mean we are losing money and losing at trade, but that fails to explain Trump’s success in areas with trade surpluses or the general unpopularity of protectionism that Dr. Sumner discusses.
Michael Rulle
May 6 2018 at 10:47am
@Kenneth Duda
I might be misreading, or do not understand, what you wrote in your third paragraph. While it is true a trade deficit results in a capital surplus, it appears you have the impact backwards. A capital account surplus means we have less investment in other countries than other countries have in the US. (Having said that, it happens to be the case we do earn more from our investments overseas, than other countries earn on their investments here, and have for almost forever).Also, your term “forcing†seems not quite the case. I have always assumed we out earn on our foreign investments because other countries by more of our debt and we tend to make more direct investments, almost like a Private Equity firm.
I also don’t understand your “losing money†concept because we have a trade deficit. I often like to use an extreme example to make this point. What if countries were willing to just sell 20 times more to us than they sell now, but at the same price as what they currently sell 1/20th of that. Would we be “losing money�. If other countries subsidize exports they are the ones losing.
Still, it does not mean we should not focus on trade agreements. We should always want other countries to not put
restrictions on our ability to export to them.
Re: Scott’s comment on Quartz, I don’t really understand what Quartz’ point is. What difference does it make, from a Macro perspective, that certain industries are drivers of productivity gains. Hasn’t that always been true, just by randomness alone? Of course some benefit and others do not depending their industry. But I believe our manufacturing productivity trend is at least 50 years old and likely more. I agree that we likely are more productive in industries with a higher percentage of Capital investments.
Regarding our unemployment rate of 3.9%, I don’t understand why we use that number rather than the employment rate. Both FRED and tradingeconomics.com state our employment rate, which appears to count only working age people, is a couple of percent lower than it was 10 years ago. I realize that unemployment rate does not count people not looking for work, but from a macro perspective what difference does that make? It assumes those not looking will never look. In particular, does this not also impact Fed policy in a negative way, by creating a tightening bias?
Matthew Opitz
May 6 2018 at 10:52am
Money entering the country as a trade surplus and money entering the country as investment are two different things.
Money coming in as a trade surplus means that Americans own that money outright. Money coming in as an investment means that foreigners own the asset and will charge interest (or rent, if the money is being used to buy real-estate, or dividends if the money is being used to buy shares in companies).
The consequences for job growth in the short-term might look the same, but the two scenarios are very different, especially for Americans who care about nationality and who want Americans to own real-estate in Seattle and factories in Charlotte, and office space in Indianapolis, etc. (I know that this concern about nationalism is difficult for classical liberals to comprehend).
Equating a trade surplus with investment flows is a bit like if Joe and Tom traded with each other, but Joe continually bought more from Tom than he sold back to Tom. So, initially Joe’s balance of money runs down.
Any American would rightly perceive this situation as unsustainable. If you tell those Americans, “Don’t worry, that money will come right back to Joe when Tom *invests* in Joe” (i.e. loans money to Joe). That’s like saying, it doesn’t matter how little you get paid at your job as long as the bank is still lending you money. If you are continually more and more reliant on such external “investment,” you can expect to suffer higher and higher interest rates and debt service costs than would otherwise be the case, all other things being equal…as well as a feeling of lost sovereignty over your individual life (or your country).
It doesn’t matter whether Joe thinks the trades were “worth it” in the sense of having stuff now, or having consumed stuff, that seems more personally useful or gratifying to him than holding the previous money he was holding. Yes, in that sense he might have “profited” from trade in a use-value sense, but if now his combined money balances and the market prices of the assets he purchased amount to less purchasing power than he had before (and this is likely to be the case especially if some of those assets were simply consumed), then it is an objective fact that Joe’s purchasing power on the world market has decreased, and no warm fuzzy feelings about how gratifying that consumption was will change that.
The only way that a trade-deficit in the short-term would increase Joe’s exchange-value would be if, instead of consuming his investments, Joe was able to use those investments to generate a greater return than the interest/rent/dividends he is paying to Tom on the money/assets that Tom originally “invested” in Joe; i.e. borrowing from Tom at 5% interest and turning that into a business making a 10% return.
But, in order to accomplish that return, Joe would either need to run a trade surplus with someone else (so that there was a net inflow of money), or Joe would need to mine enough gold so that his purchasing power could endogenously increase by the needed degree.
(Of course, we know that simply printing paper money would not increase Joe’s real aggregate purchasing power. But gold is different. It is non-neutral, both short and long-term. An increase in a country’s gold holdings does not increase the gold-prices of commodities; instead, the increased gold holdings leave prices more or less the same but increase real purchasing power and decrease interest-rates, all other things being equal, regardless of whether the country is under a legal gold convertibility standard. A greater reliance on credit, by the way, is also non-neutral, in that it also increases real purchasing power, except the problem is that it also *increases* interest rates, which is not sustainable for industry and consumers at a certain point).
Jon Murphy
May 6 2018 at 11:15am
@Matthew Optiz
Money coming in as a trade surplus means that Americans own that money outright. Money coming in as an investment means that foreigners own the asset and will charge interest (or rent, if the money is being used to buy real-estate, or dividends if the money is being used to buy shares in companies).
This doesn’t make sense to me. Americans own the money outright in either case. The foreigner is either buying goods/services or he’s buying an asset. Either way, the previous American owner is getting the money; the American “owns” the money outright.
Kenneth Duda
May 6 2018 at 11:49am
Jon, you wrote:
Of course you are right; trade deficits don’t mean anyone is losing money. You misunderstood me when I was articulating Trump’s argument, an argument I do not agree with. Trump’s argument is wrong, as you point out. But, this argument is part of why people think trade is a problem, even when it’s actually beneficial.
Sorry for the confusion.
-Ken
Kenneth Duda
May 6 2018 at 11:52am
Michael:
Sorry for the confusion. That’s not my concept, it’s Trump’s. It seems to be what Trump really believes about trade. He says it over and over and over, over many years. He’s totally wrong of course, as you point out.
-Ken
Kenneth Duda
May 6 2018 at 11:55am
Michael, you wrote:
I agree with your private equity firm analogy exactly. This is exactly what’s happening — our superior investing strategy is enabling us to run trade deficits year after year while maintaining the dollar’s value relative to other currencies. I’m not sure where, if anywhere, you and I see things differently. Probably, I just didn’t explain what I was trying to say clearly.
-Ken
Kenneth Duda
May 6 2018 at 11:58am
Matthew, you wrote:
This is true but not relevant. What’s relevant is that the capital account includes investment returns. Money entering the country as return on foreign investment (capital account) balances money leaving as a trade deficit (current account). So, we have a sustainable situation that’s very much to our advantage from a gross lifetime consumption viewpoint.
-Ken
Kenneth Duda
May 6 2018 at 12:07pm
Sorry, one more point for Matthew:
Imagine I own $1M worth of stock that has a 10% dividend yield. Say I have no other source of income, and I spend all $100k on consumption items. Someone else is doing all the work for me — sounds pretty nice! My household will have a capital account surplus of $100k every year, and a current account deficit of $100k. Every single year. Year after year.
Would you say I have a problem with trade balance?
This matches the general nature of the situation for the United States as a whole relative to other countries. It’s a really nice place to be. Leave it to Trump to use it as evidence that lily-livered liberals who hate the country have sold out the Real Americans to scary foreigners.
-Ken
Ed Hanson
May 6 2018 at 12:31pm
Scott
You are correct when you wrote, “there are specific areas where trade has reduced employment.” That creates a highly interested faction that the general interest never competes well against.
I suspect the most impacted industries are those which the government has put into place regulation and law that reduces the ability of those industries to adjust to competition from trade. Example are laws which strengthen unions over companies, and antitrust actions which at the margin reduce efficiency of consolidation.
Past government action drives the demand for new government action.
Ed
Matthew Opitz
May 6 2018 at 12:58pm
@Jon Murphy:
The ideal of many Americans would be that the American owns both the asset AND the money, which is possible if the money is obtained through exports of things produced by the asset rather than by the export or sale of the asset itself. Americans do not want to see their companies or their country cannibalizing themselves by selling off real-estate, capital goods, shares, government debt, etc. just so that Americans can (temporarily) continue to import consumer goods because Americans rightly understand that this is unsustainable. We are killing the goose that lays the golden eggs.
To be clear: I’m not claiming that the foreign investment transaction is unequal. It is the circumstances that pressure Americans to make that sort of transaction that are unfavorable to Americans.
For example, let’s imagine you own a business, but the business makes a loss year after year and goes into debt. You decide to sell off the business and use the proceeds to pay off the debt. (In other words, the buyer of the business is “investing” in your business). At the end of it all, you end up with zero net worth and discover that you must become a wage-worker.
In this scenario, I don’t doubt that you can get a fair value for selling off your business. But it is not to your advantage to find yourself in that situation in the first place where you find yourself needing to do that. It would have been preferable to have had a successful business, to accumulate assets and/or increase your money balances and/or make loans (where YOU are the investor), and to accomplish all of this by net-exporting to the rest of the world.
For example, the U.S. gets more than a fair deal in its sale of treasury bonds, for example. It is really quite charitable for investors (both foreign and domestic) to be willing to buy 10-year bonds from the U.S. Govt. for only 3%. This is not where the bad deal is happening. Likewise, when Chinese investors buy real-estate in Seattle, I don’t doubt that they are paying a fair value for that.
And if the U.S. Govt. were reinvesting that money into productive investment that yielded, say, a 5% return (allowing the U.S. Govt. to accumulate money balances and/or assets and/or pay down its existing debt), rather than simply consuming it on the military and social services, then it would make the U.S. stronger year after year. Likewise, if the homeowner who sold the Seattle home to the Chinese reinvested that money to make an even larger return compared to the rent on that house, thus allowing that former homeowner to accumulate additional assets rather than having to cannibalize those assets simply in order to finance short-term consumption, then yeah, Americans would have no complaints.
@Kenneth Duda
Your scenario is acceptable, although I don’t think a lot of Americans would be thrilled about it. I think a lot of Americans would be more thrilled if you were spending only $50k per year on consumption goods and accumulating $50k of new productive assets each year.
But a more representative scenario would be where an American is getting maybe $50k in dividends each year, but is also selling off another $50k of their capital base each year, and consuming the resulting $100k on consumer goods that might be very “productive” of use-value (utility, gratification) for the consumer, but which are non-productive of additional exchange-value (purchasing power). And of course, those $50k in dividends will be decreasing the next year as the capital base is cannibalized…so $100k will not be available for consumption unless an even larger amount of the remaining capital base is sold off each year in order to keep total consumption at $100k. This is the sort of unsustainable situation that worries Trump voters.
Jon Murphy
May 6 2018 at 1:03pm
@ Kenneth Duda
My apologies for misunderstanding you. I agree Trump certainly thinks that trade deficits are lost money. However, I’m not sure that many people think it’s true given the popularity of Trump in areas with trade surpluses and the general popularity of free trade
Scott Sumner
May 6 2018 at 3:00pm
Everyone, Let me emphasize one point. One can debate whether the trade deficit is or is not a problem, but that wasn’t the point of this post. The trade deficit got smaller after 2000 (although it has ticked up a bit in the past year due to Trump’s policies.)
So if a bigger trade deficit is a cause of job loss in manufacturing, then it should have been a net positive for manufacturing jobs since 2000, as the deficit got smaller.
So even apart from the theoretical argument as to whether deficits cost jobs, the numbers don’t even support the argument.
Ed Hanson
May 6 2018 at 6:03pm
Scott
I doubt any your readers disagree with the economics that you point out. But trade sentiment about job loss is a political matter, and no matter how sound the economic argument is, it will not change that sentiment. For example, just observe minimum wage politics.
If the subject is sufficiently important enough to you because of legitimate fears of an all out trade war or legislation of the Smoot-Hawley kind; then you must use political methods to counter the worse. In this case, I would suggest a compromise position of supporting reciprocal tariffs especially with our major trade partners. The US matching their higher tariffs.
Yes this does raise tariffs, but not near the extent of a trade war. And it may infuse those trading partners with a stronger idea of reducing tariffs quicker in future trade negotiations.
Ed
Larry
May 6 2018 at 6:36pm
The mfg job losses were concentrated geographically and by industry and. Amr very fast. Millions of those workers went for Trump. That said, I think his support was more cultural than economic. That is less susceptible to growth changes.
Hazel Meade
May 7 2018 at 11:43am
There may be a framing issue involved. We use negative language (i.e. “deficit”) to talk about the situation where foreigners give us tangible goods in exchange for pieces of paper. Calling it a “deficit” implies that the money was worth more than the goods so that the exchange counts as a loss, when it’s actually a win. The goods are worth more than the money to us, or we wouldn’t be buying them.
In fact the whole language of accounting with red and black being used to describe exchanges of goods is constructed in a way that frames all trade as zero-sum, when it is actually positive sum. A gain on one side is not a loss on the other. The language we use to discuss trade needs to be reconstructed in a way that captures that fact.
pyroseed13
May 7 2018 at 11:52am
“That may be true, but trade doesn’t really account for the huge drop in manufacturing employment since 2000.”
If you look at manufacturing employment between 2001 and 2008, there was a steep drop in it that never fully recovered. There’s no other explanation for this other than China’s entry into the WTO in 2001. Yes, manufacturing employment as a share of all employment has been trending downward for decades due to automation. But the question is how to explain that steep drop in the raw numbers, and I don’t think there any automation shocks in 2001 that would explain this.
Hazel Meade
May 7 2018 at 11:53am
@Matthew Optiz,
A facet you are missing is that imports are not only of consumer goods, they are also of goods which are manufacturing inputs, such as steel. Physical goods, not just money, can be investments as well. You buy the steel, make higher value objects out of it, and sell those objects. Also international trade is not binary. Joe may continually buy things from Tom, then make stuff out of the things he has purchases, and tell them to Dick and Harry. He can thus continually run a trade deficit with Tom, despite also getting much, much richer than Tom.
Conceptually, one could also think of a trianguar trade flow, with goods going clockwise and money going counter-clockwise. That situation can continue indefinitely, with every partner running a trade deficit with one of their neighbors and a trade surplus with the other.
art andreassen
May 7 2018 at 3:04pm
Scott: I have been banging on for some time about the horrendous impact to the National Accounts caused by the Bureau of Labor Statistics price deflation procedures which this article addresses.
For decades the BLS has made estimates of quality changes to the products it is calculating price indexes for. Until the appearance of computers these changes have been minor and had little real economic effect. What has been ignored for this whole time is that the BLS has changed the real dollar output side of the National accounts to an unspecified amount. This dollar amount is not based on any economic transaction and is not balanced specifically on the input or income side of the accounts. This means the increases allocated to an industry output and therefore its productivity has no match on the income of the employees or the firms that are supposedly responsible for it.
When one talks about the benefits of technological change in the past there has been an actual monetary benefit to those producing it, not so today. A perfect example of the problem is Moore’s Law which premised that the number of transistors in an integrated circuit would double every two years. Does the income of the employees producing these circuits double? In the past the producers of the advances have received income which enabled them to spend and create other jobs.
In other words, economists believe that if the BLS says that productivity has increased then there must have been only good results from it. I think you give too little credence to the adverse real affects that were mentioned in the papers at the conclusion of the paper.
Scott Sumner
May 7 2018 at 5:46pm
Pyroseed13 and Art, Neither of you address the issue I raised in this post. Even if the article is right about computers, and even if China caused job loss in specific industries, the trade deficit has been getting smaller.
Critics of trade need a mechanism by which trade would cost jobs, in aggregate, without increasing the trade deficit. What is that mechanism?
art andreassen
May 7 2018 at 11:31pm
Scott: Don’t know if you have seen the Noah Smith blog @noahopinion of May 4 where he presents this Vox article and proceeds it with comments to the affect that those who claim that it is technology and not trade that is responsible for job loss should read and reconsider.
Saying that computers and China haven’t caused job loss because you don’t see a mechanism to explain it sufficient to satisfy you seems to indicate that you don’t agree with the papers referenced in the article.
My point is that the fantasy “productivity” that resulted from the BLS creating real output with their deflation process blinded economists to what was happening in the real world and allowed the Chinese to game the system to their advantage.
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