Will smaller trade deficits bring back manufacturing jobs?

September 17, 2020 10:15 AM
Image credit: 
REUTERS/Jim Young

President Donald Trump harnessed his successful 2016 presidential campaign to the issue of lost manufacturing jobs and the “evils” of trade deficits. The Republican national convention in August 2020 demonstrated his determination to do so again. Trump blames trade and offshoring of manufacturing jobs overseas. Democratic presidential nominee former vice president Joe Biden is also making the recovery of manufacturing jobs central to his campaign. Both Trump and Biden propose new programs to enhance US industrial production and technologies. But the problem is that some of their proposals may be less effective in creating additional manufacturing jobs than they assume.

Concerns about the loss of manufacturing jobs are understandable, especially since both candidates are going after middle class voters in the so-called Rust Belt states—voters who helped Trump win four years ago. In 1970, for example, men who had not graduated from college held 35 percent of the jobs in manufacturing. But over the past five decades the share of US employment in manufacturing has declined steadily, dropping precipitously from 17.3 million jobs in 2000 to 11.5 million jobs in 2010. Since 2010, despite almost a decade of recovery and Trump’s focus on reducing US manufacturing trade deficits, only a fifth of the lost manufacturing jobs had been replaced, and that was before the job losses caused by the COVID-19 shock.

To compete with foreign manufacturers, Trump and Biden seem to agree that policies are needed to enhance US international competitiveness and increase the US trade balance in manufactured products. But policies that improve technological capabilities present a dilemma that their advocates usually ignore: Faster growth in manufacturing productivity, which better technologies bring about, does not necessarily lead to more jobs. Improved productivity generally implies that goods can be manufactured more cheaply using fewer workers, so unless there is high enough demand at home and abroad for the lower-priced or new products that productivity growth generates, the impact on jobs could be substantially smaller than might be expected.

This point is reinforced in my PIIE Working Paper with respect to international trade in manufactured goods. The paper examines 60 countries between 1995 and 2011 to explore the relationship between trade balances in manufacturing value added and their shares of manufacturing employment in total employment. Surprisingly perhaps, it finds that the declines in the share of manufacturing employment in countries with the largest manufacturing trade surpluses were actually slightly larger than the declines in countries with the largest manufacturing trade deficits. Additionally, the declines in manufacturing employment shares were as large in countries in which the manufacturing trade balance moved in a positive direction as the declines in manufacturing employment shares in countries in which the manufacturing trade balance shrank.

The basic explanation lies in the differences in productivity between the two groups. The trade surplus countries had higher levels of value added per worker than those with deficits. As might be expected, while these higher productivity levels increased the share of their output in manufacturing and their greater competitiveness generated larger manufacturing trade balances, their domestic spending on manufactured goods did not increase sufficiently to make up for the jobs lost to higher productivity and their higher productivity also meant that their trade surpluses created fewer jobs than they had before. By contrast, the deficit countries had lower output per worker in manufacturing and their manufacturing employment losses were less due to their smaller declines in domestic spending on manufactured goods.

The figure below traces the long-run behavior of the share of manufacturing employment in total employment in some of the countries with the largest manufacturing trade surpluses as a share of GDP in the working paper’s 60-country sample.[1] Ireland had the largest trade surplus in manufacturing value added, averaging 11.6 percent of its GDP between 1995 and 2011. Others with large surpluses over this period included Singapore (9.1 percent of GDP), Korea (6.4 percent), Taiwan (5.7), Germany (4.9 percent), and Malaysia (4.4 percent). The figure vividly illustrates how the manufacturing employment shares in these countries historically followed a hump-shaped path—rising in the early stages of development and then after reaching a peak—despite their trade surpluses—steadily declining. Because of the powerful influence of faster manufacturing productivity growth, as the economic theory of structural change in an open economy suggests ( Uy, Yi, and Zhang 2013), once certain levels of per capita income are reached, the share of manufacturing employment inevitably declines. Indeed, it appears that even China, the country with the highest share of manufacturing in its output, passed its peak manufacturing employment share in 2015 and the share has been declining ever since (Lawrence 2019).

Figure Even nations with large trade surpluses in manufacturing have seen a decline in manufacturing employment shares

This finding suggests that whatever their other merits, policies that emphasize improving high-tech manufacturing competitiveness may not actually boost manufacturing employment all that much. Moreover, these policies are also likely to disproportionately increase the demand for highly skilled and educated workers and could therefore exacerbate income inequality stemming from higher wages paid to college-educated workers for their skills.

In addition to industrial policies aimed at enhancing technology and competitiveness, both Trump and to some extent Biden advocate for bringing global supply chains back to the United States by raising trade barriers and using government procurement spending to buy locally produced products. This approach could boost manufacturing employment in favored industries. But it will also raise costs for other industries dependent on such supply chains, so exports could be penalized and overall job gains may again be less than expected.

Note

1. I use trade data from UN Comtrade database and manufacturing employment shares from the Groningen Growth and Development Center (GGDC) 10-Sector Database (Timmer, de Vries, and de Vries 2015), International Labor Organization Department of Statistics, and the Conference Board’s International Comparisons of Manufacturing Productivity and Unit Labor Costs database.