A few more reflections on the current trade debate

March 15th, 2016 at 8:42 pm

I’m not done thinking about trade policy, especially after getting lots of interesting feedback from my NYT oped earlier this week. I’d put the responses into the following bins:

a) I agree! My family/community and I have been seriously hurt by trade and it’s about time the pundits and politicians started to get that.

b) I hope you’re right (that we won’t go back to fighting about FTAs anytime soon), but don’t be fooled by candidates who fake left and go right on this.

c) Stop complaining. Manufacturing jobs aren’t coming back and you and the other “protectionists” need to get over it.

d) You’re an idiot.

I won’t comment on ‘d.’ One hears that regularly in comment sections, and I can’t speak to its veracity, though I won’t say it’s wrong.

On ‘a,’ which was by far the most common response, there seems to be an outpouring of relief by people who feel that the reality of trade as a double-edged sword is finally getting elevated by the press, the punditry, and the candidates. Ed Porter’s piece today on this point (“On Trade, Angry Voters Have a Point”) is thoughtful and instructive, and Dean Baker adds important points as well, citing numerous aspects of the imbalanced trade problem, many of which I left out.

On ‘b,’ I’ve tried to hedge my language, because that of course may be correct.

On ‘c,’ we have a problem. First, as in Dan Drezner’s piece, there’s the silly “protectionist” name-calling. Clearly, my piece stressed not only the benefits of trade (along with the costs) but also that trade and globalization will proceed apace. It will do so, I predict, without FTAs. I could be wrong about that last part (see ‘b’) but not about the first part. I consider that–expanded trade–a positive development, both for the increased supply of goods here and the growth opportunities of emerging economies.

I also explicitly agree in the oped re lost jobs not coming back. Where I differ from point ‘c’ people is that I’m not convinced the sector can’t add jobs, perhaps in significant numbers. So let’s look a bit at the critics’ arguments and where they go wrong.

Myth 1: We’ve been losing manufacturing jobs for many decades, and that’s not going to change.

Actually, as the figure below shows, we lost a lot of manufacturing jobs in only one decade—the 2000s. It was in this period, after China joined the WTO and our trade deficit with them grew sharply (see Figure 1 here). In fact, our trade deficit as a share of GDP in the mid-2000s of about -6% was the largest on record. Deficits of this magnitude cause not only a severe drag on growth, but since they must be offset if we’re to avoid recession, they’ve contributed to damaging bubbles in recent years (it’s all here in Chapter 5).

Source: BLS

Source: BLS

Other than that, manufacturing employment was remarkably steady, holding at around 17-18 million from the 1970s to 2000. Since employment grew over this period, these jobs fell as a share of the total over that period, as is the case in every advanced economy, as expanded trade meant that more domestic demand for manufactured goods would be met through imports, especially lower-end goods like textiles.

But manufacturing jobs don’t always decline–including in recent years, as you see at the end of the figure.

Myth 2: We can’t add jobs in manufacturing because the sector is so productive.

This is the idea that even if we can expand manufacturing output, it won’t lead to jobs, because robotics are replacing workers in factories across the land. That’s wrong on two counts, the latter of which is most important.

First, the robot story implies an acceleration of manufacturing productivity (more output with fewer workers equals faster productivity growth), for which there is no evidence. The next figure plots manufacturing productivity growth (real output per hour), with a smooth trend through the bips and bops. It’s a noisy series, but there’s no trend there (I wouldn’t make too much of the dip at the end).

Source: BLS, HP filter

Source: BLS, HP filter

Second, since when was productivity a job killer? Economy-wide, both productivity and jobs have grown considerably over the years, with the intervening variable being demand, of course. In fact, the correlation between the annual percent change in manufacturing productivity and jobs in the sector is small but positive, and it grows over time (e.g., r=0.17 over full period, 1950-2015; r=0.30, since 1989 and 0.36 since 2000).

Our productivity edge is how we (or Germany, or other advanced economies) are able to compete globally despite our relatively high labor costs. But we can’t compete if the currency playing field is uneven, or when trading partners build up a “savings glut” that ends up importing consumer and labor demand from us (or, in Europe, from periphery countries to Germany, which is running trade surpluses of 8% of GDP). This is the trade deficit problem which I fret about and many of my critics fail to address.

Here are some results from a toy model. I definitely wouldn’t read much into this—the R-sq is a measly 0.17. But surely the “manufacturing productivity kills jobs” folks would expect a negative coefficient if we regressed manufacturing employment on productivity growth in the sector.

Not so, as the output below shows (see data note for details). Both productivity and net exports (both lagged) as a share of GDP load positively.

Source: See data note.

Source: See data note.

Like I said, it’s not much of a model, but what happens if we set net exports/GDP to zero starting in 1979 (which was about its average from 1950-79) instead of letting them go to the big negative place? The results are in the next figure. First, note that the baseline kinda roughly follows the actual levels of manufacturing employment (MAN). But once we disallow the trade deficit from going south, employment keeps growing, even as productivity growth continues apace.

Source: See data note.

Source: See data note.

I don’t really think we’d have 24 million factory jobs now instead of about 12 million had the trade deficit not grown. The factors driving manufacturing employment growth of course involve more than productivity and net exports. But I humbly submit that this humble model is telling us something important about the way forward, which is a) if we want to help our factory sector, we need to pursue more balanced trade, and b) productivity is not the problem.

My hope, as expressed in the oped, is that by getting the cards on the table about the real impacts of trade while taking a long break from divisive FTA fights, we may be making some progress towards a smarter trade debate. It would help if people didn’t label you protectionist the minute you start thinking about the problem.

Data note: The BLS quarterly manufacturing productivity series only goes back to 1987, so before then I used the annual manufacturing productivity data from the BLS international series. Net exports/GDP are from BEA/NIPA. Manufacturing employment is from the establishment survey. Manufacturing employment and productivity are entered as log growth rates.

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6 comments in reply to "A few more reflections on the current trade debate"

  1. spencer says:

    I believe that the political discussion is ignoring the real cause of the structural trade deficit.

    Moreover, the theory that free trade always a good thing where the benefits outweigh the costs assume that trade is balanced.

    But since the early 1980s trade has not been balanced and the cause of the imbalance is not free trade and trade deals.

    The dominant cause of the structural trade deficit is the domestic savings- investment gap.
    To finance this gap requires a massive inflow of foreign capital and this .inflow is what drives the trade deficit. The current account must equal the domestic savings -investment gap. Remember, we always use to discuss this as the twin deficit problem. So the real driving force behind the trade deficit is the structural federal deficit.

    And what drives the federal deficits — republican tax cuts. When Reagan first created the structural federal deficit economist that looked at the US as a closed economy predicted that the deficit would cause interest rate to rise and crowd out domestic investment. But they were wrong because they did not anticipate the massive inflow of foreign capital that in turn would cause the dollar to soar and the trade deficit to explode.

    So the real reason that manufacturing is weak and manufacturing jobs are falling is the republican tax cuts. So when you talk about the factors you keep talking about for the trade deficit you are falling for the bait and switch of the republican propaganda machine.

    • Smith says:

      All wrong. First a few facts. The trade deficit is made up of oil, cars, and Chinese goods. There is also a huge trade gap with Mexico and Canada. The gulf oil states can not buy enough fighter jets to make up for their oil sales. Fracking has reduced our dependence, but a rational policy would have directed greater resources to alternative energy after the 1970s price hikes. Reagan and Republicans blocked that. Time and $120/barrel oil unblocked it. Still more R&D money is needed. As for cars, few in Japan are clamoring for American autos due to their famed reliability and frugal use of fuel, nor are Germans anxiously anticipating the marvels of next year’s models showcasing American engineering. Detroit meanwhile has once again bet the farm on pickups and SUVs which will outsell sedans until the next oil crisis and subsequent auto bailout. Conditions of the last bailout led them kicking and screaming down the path of improved MPG. One might add, Japan has cultural norms, and regulatory barriers which inhibit foreign business, which no trade agreement can address. Germany has high wages, but barriers to closing and relocating factories (corporate governance and labor law). China has potentially the largest or second largest (after India) market on the planet. US companies sell their souls, controlling interest, and critical technology, as China requires them to locate in country to sell there. The wholesale relocation of American manufacturing overseas will pale in comparison as an economic setback once China has taken over everything else, technology, advanced manufacturing processes, computer security, and anything with a military application including AI and robotics. Establishing minimum labor rights for import products would be a first step. Clinton granted most favored nation status, as the mechanism for a human rights tariff is already in place. http://tech.mit.edu/V114/N27/china.27w.html
      Moreover, corporations should be taxed on foreign profits even without repatriation, and no tax holiday or lower rates should be allowed (contrary to Obama, and Clinton) https://newrepublic.com/article/117763/clinton-proposes-repatriation-tax-holiday-fund-infrastructure-bank

  2. urban legend says:

    Why is the President throwing so much of his remaining political capital behind the TPP? It will certainly harm his legacy among progressives who despise these trade agreements. There seems to be little economic benefit for the U.S., and limited political benefit that won’t be disproportionately paid for by select groups of workers in the country. He doesn’t need it to punch his ticket to Davos from the end of this term to eternity. His foundation will easily raise billions without this, and will get him and his insiders a seat at every table of power next to Bill Clinton’s seat. The Democratic Party doesn’t really need the money from the Big Interests who have dictated its terms, and, in fact, its sponsorship by Obama is harmful to the image of the Democratic Party — at a time when it has become obvious that striving for bipartisanship with a party that refuses to participate is damaging to the country and the greatest national priority for all people of good faith should be tossing as many current Republicans as possible out of office. Obama has simply declared that Elizabeth Warren is “wrong” for opposing it without a peep of explanation that would defend it against her critiques.

    For years, the “free trade” law and finance establishment has managed to slip the Investor-State Dispute Resolution process into agreements without anyone paying close attention, but that’s the only argument its proponents seem to have: we’ve been doing it or a long time, so it must be OK. Looking at the principles of it — allowing multi-national corporations to be compensated by a country’s taxpayers for harm even from health and safety laws protecting the public when national corporations similarly harmed may not take advantage of the same forum and may not be compensated; allowing multi-national corporations to bypass even well-developed court systems that their national competitors must use for redress, and to invoke arbitration under the ISDR provision; and a non-appealable and often secret or semi-secret arbitration process positively saturated with potential conflicts-of-interest — that provision seems impossible to defend.

    Now that people are paying attention, we’ve seen what look like real horror stories of companies being compensated for not being allowed to sell dangerous products. We also are seeing that a number of other countries are backing away from the ISDR provisions or refusing to accept them at all, although the administration seems to go out of its way not to publicize that or defend the U.S. not joining them. Supposedly, there are provisions addressing labor and environmental standards, but they seem to be, at best, have extremely weak enforcement mechanisms if there are any at all.

    So, what the hell is going on here?

  3. save_the_rustbelt@yahoo.com says:

    After spending 30 years trying to understand how to make this work, I have come to the pessimistic conclusion that U.S. blue collar workers are just screwed, as in vulnerable every day of their lives, and it will probably require a couple of generations before we can reshape the work force and the economy.

    Until then, economic uncertainty will be the fate of those who do “honest work” which also includes many middle class pink and white collar workers.

    We are too far down the wrong road.

  4. Chris G says:

    The “net exports/GDP=0” strikes me as a useful comp. I recall Dean Baker estimating on a number of occasions roughly how many jobs one would expect are lost due to running the trade deficit we do.

    Another thing about manufacturing, something which doesn’t get captured in economic stats: There is inherent value in being able to build things that work. Loss of manufacturing jobs isn’t just a loss of jobs but a decline of a culture. “Knowledge work” and “symbolic analysis” is fundamentally different in nature. Related: Historically, how have societies which didn’t make the items on which they relied for everyday life fared? Are there examples of ones which have been long-term successful? If so, what are some examples? The Dutch immediately come to mind. IIRC, they were traders during the country’s “golden age” – but I’m guessing traders who didn’t run huge trade deficits. That example suggests you don’t need to make your own stuff in order to be successful but we’re not traders, consumers really, and we run big trade deficits. Are there any plausible comps for the direction we’re headed as a society? (Any historians/anthropologists in the audience?)