Americans have a love-hate relationship with foreign trade. In the marketplace, we’re enthusiasts. During 2012, we scarfed up $2.3 trillion in imports: cars, computers, clothes, smartphones, shoes, toys, oil and much more. We are also eager exporters, though not as successful, peddling $1.6 trillion last year in jets, tractors, pharmaceuticals and corn, among other things. But in the political arena, we’re skeptics. By one typical poll, 63 percent of respondents declared trade “bad” because it “results in the loss of jobs and lower wages.” Only 30 percent cheered that it reduces prices and expands choices for consumers.
The conflicts permeate public debate. We’re obsessed with “competitiveness” and denounce “unfair” trade practices. Led by China and India, “emerging-market” countries seem especially threatening. Meanwhile, the White House has proposed new trade pacts with Asia and Europe. Is trade good or bad? Can we separate rhetoric from reality?
A new study by two pro-trade economists tries to do just that. It concludes that trade often receives more blame for our problems than it deserves. Consider the decline of U.S. manufacturing, which is probably the most serious charge leveled against trade.
Measured by jobs, the fall has been deep and persistent. From 1973 to 2010, manufacturing’s share of total non-farm U.S. employment has dropped from 25 percent to 10 percent. The recent decline has been particularly severe, with more than 5 million jobs disappearing since 2000. Some losses clearly stemmed from the Great Recession. But trade is often portrayed as the real villain; imports — cheap and sometimes subsidized — allegedly did the dirty deed.
The reality is more complicated, Robert Lawrence of Harvard and Lawrence Edwards of the University of Cape Town argue in “Rising Tide,” published by the Peterson Institute for International Economics. What’s happened, they write, is that factories have gotten spectacularly more efficient. They produce more goods with fewer people. In economics jargon, their “productivity” is rising. Manufacturing employment is shrinking not mainly because jobs are moving “offshore” — though this obviously happens — but because fewer workers are needed.
Interestingly, the proof lies abroad. In most advanced countries, even those with strong export sectors, manufacturing’s share of jobs has plummeted. From 1973 to 2010, manufacturing’s proportion of employment fell from 22 percent to 10 percent in Canada; from 37 percent to 21 percent in Germany; from 23 percent to 9 percent in Australia; from 28 percent to 17 percent in Japan; and from 29 percent to 13 percent in France. A report from the Congressional Research Service reaches the same conclusion and adds South Korea and Taiwan to the list of countries with declining factory jobs.
Manufacturing’s story parallels agriculture’s. Improved seeds, mechanization, planting and harvesting techniques enable fewer people to produce more food. Greater productivity lowers relative prices. But for food and manufactured goods, lower prices do not stimulate a corresponding rise in demand. How many refrigerators, after all, do consumers want? (Again, in economics lingo, demand for manufactured goods is “price inelastic,” say the two economists. A 10 percent fall in prices does not increase demand 10 percent.) Lower prices for manufactured products frees up money to spend on services — health care, education, travel, apps.
By this process, living standards rise. Gains from manufacturing trade, through lower prices and greater choice, do the same. Lawrence and Edwards estimate these at about $1,000 for each American; about half reflect trade with emerging-market nations.
The lesson is that trade’s virtues tend to be underrated and its vices overstated. Although imports worsen the secular loss of manufacturing jobs, the perceived impact is probably greater than the actual impact. Suppose, say the two economists, the United States had no manufacturing trade deficit. This would, they estimate, boost U.S. factory jobs by 2.7 million. That’s a lot of jobs and would significantly add to manufacturing’s total, now about 12 million. Still, it pales beside the Great Recession’s employment loss (8.7 million) or total payroll employment (about 135 million).
Even if these factory jobs magically materialized, gains might be temporary. Advancing productivity could soon erode the total. Similarly, it’s true that foreign competition puts downward pressure on U.S. wages and has, almost certainly, contributed to growing wage inequality. But the effect seems modest, because trade doesn’t dominate the labor market.
None of this means that we should embrace trade uncritically. America’s chronic trade deficits partly reflect the dollar’s historical role as the main international currency, which has kept its exchange rate at a level that encourages imports and discourages exports. But other countries’ subsidies, currency manipulations and protectionist policies compound the pressure on U.S. producers. We need to defend our interests without assuming that lopsided trade — and foreigners — is the source of all our problems. All too often, the fault lies at home.
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