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China and the decline in U.S. manufacturing jobs

Although this now seems a distant memory, it is helpful to recall that as late as the last decade of the 20th century, the U.S. labor market was demonstrating great vitality. Between 1991 and 2000, the employment/population ratio increased by 1.5 percent among men and by 3 percent among women. In fact, the national unemployment rate in 2000 was a remarkably low 4 percent. Since then, however, things have not been quite as commendable.

Between 2001 and 2007, the male employment rate gave up all the ground it had gained between 1991 and 2000 and female employment rates also declined. The point to note is that even before the Great Recession began in 2007, the performance of the U.S. labor market was anemic, with average employment growth of only 0.9 percent between 2000 and 2007. Although we are now all aware of the insalubrious performance of the U.S. labor market even before the Great Recession hit us, we do not clearly comprehend what caused this lackluster performance. Interesting new research by the economists Daron Acemoglu, David Autor, David Dorn and Gordon Hanson sheds valuable light on this matter.

These researchers begin by pointing out that the pre-Great Recession employment decline of the 2000s coincided with a major increase in import competition from China. This import competition disproportionately affected the U.S. manufacturing sector. The numbers, in this regard, are simply staggering. China’s share in U.S. manufacturing imports grew from 4.5 percent in 1991 to 10.9 percent in 2001, and then to an astounding 23.1 percent in 2011. At the same time, after staying relatively unchanged during much of the 1990s, U.S. manufacturing employment declined by 18.7 percent between 2000 and 2007.

A key point made by the above researchers is that a significant part of the decline in U.S. manufacturing employment can be attributed to increasing import competition from China. To bolster this central claim, the researchers look at direct and indirect impacts of trade with China. Consider the direct impact first. Had import competition from China not grown after 1999, approximately 560,000 fewer U.S. manufacturing jobs would have been lost through 2011. To put it differently, the direct impact of increased Chinese import competition was responsible for about 10 percent of the actual decline in manufacturing employment in this country.

There are several indirect impacts of trade with China, and these researchers show that their role in affecting U.S. manufacturing employment is nuanced. For instance, when we add to the above direct impact one kind of indirect impact that the researchers refer to as input-output linkages, manufacturing job losses in the U.S. for the 1999-2011 time period increase from 560,000 to 985,000. Put differently, the indirect impacts substantially magnify the negative employment effect of import competition from China. More generally, the analysis undertaken by these researchers shows that not only are there substantial U.S. job losses in industries that are exposed to import competition from China, there also are either very few or no offsetting job gains in industries that are not exposed to this import competition.

Although these significant job losses paint a saturnine picture of manufacturing in the U.S., it is important to comprehend that there is no easy way to reverse this state of affairs with activist policy. Therefore, calls for granting special status to manufacturing are misguided. In this regard, Acemoglu, Autor, Dorn and Hanson rightly point out that U.S. manufacturers now recognize that the loss of comparative advantage in the sectors that China has penetrated is largely permanent.

Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology. These views are his own.

8/7/15 (c) 2015 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.

One comment

  1. Sandy Montalbano

    60% of companies’ offshored in the first place due to miscalculations. Research shows that 25% could come back simply by adopting a more comprehensive total cost analysis. 25% is equal to 1 million manufacturing jobs.

    Companies are recognizing that with the use of the refined metrics of total cost of ownership to uncover the hidden costs and risks of offshoring and reducing costs with sustainable strategies such as robotics, improved product design, innovation, automation, and lean strategies they can increase competitiveness.

    Reducing imports with domestically manufactured goods i.e. reshoring U.S. manufacturing, will reduce our trade deficit. Our companies are much more competitive manufacturing here than exporting due to the additional total costs such as duty, freight, packaging etc. If we balanced the trade deficit by reducing imports, we would create 3-4 million manufacturing jobs and about 6 million overall jobs due to the manufacturing multiplier effect.

    The Reshoring Initiative believes the best scenario is to eliminate the trade deficit by informed reshoring and Foreign Direct Investment. Our trade deficit of about $700 billion/year represents about 30% of our current manufacturing output. Balancing the trade deficit would prevent 1% annual employment declines for about 25 years while we retrained our workforce and shifted from an excess reliance on consumption to a good balance, or, ideally, a trade surplus such as Germany’s.

    The U.S. has suffered for decades with a huge trade deficit that now is about 4X the world’s next largest. Let’s convert this liability into an asset. The winning strategy is balancing the trade deficit with a strong investment in automation and skills training and increased corporate use of Total Cost for sourcing and plant siting decisions. A competitive USD and corporate tax rates would accelerate the process.

    We recommend companies use a total cost of ownership (TCO) analysis to see if reshoring manufacturing or domestic sourcing makes sense for them.

    The not-for-profit Reshoring Initiative can help.

    The not-for-profit Reshoring Initiative’s free Total Cost of Ownership software helps corporations calculate the real P&L impact of reshoring or offshoring. In many cases, companies find that, although the production cost is lower offshore, the total cost is higher, making it a good economic decision to reshore manufacturing back to the U.S. http://www.reshorenow.org/TCO_Estimator.cfm

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