Misconceptions on the Campaign Trail: US Manufacturing

April 11, 2016 11:45 AM

In the run-up to the 2016 US presidential election, candidates on both the right and the left have been taking strong anti-trade and foreign investment positions. One assertion on the campaign trail is that globalization is responsible for the decline of the US manufacturing base.

Donald Trump lamented that Americans “don’t make things anymore,” claiming “we have to bring Apple—and other companies like Apple—back to the United States…. We have a great capacity in this country.” Addressing constituents in Flint, Michigan, Bernie Sanders claimed, “Unfettered free trade turned a prosperous middle-class city…into a place where good jobs are scarce and extreme poverty is high,” attributing lost manufacturing jobs in Michigan to “failed trade policies.”

This post assesses what has actually been happening to the US manufacturing base in recent years and investigates the role of trade and investment in the evolution of US manufacturing. There is no evidence to back up claims that blocking future trade and investment agreements or undoing existing agreements will lead to a resurgence in US manufacturing employment. The US manufacturing sector is large, strong, and growing not in spite of but to a large extent because of global engagement. The United States will maintain its comparative advantage in high-skilled manufacturing but will increasingly rely on high-performance service jobs for future employment growth.

What Is Happening to the US Manufacturing Base?

Contemporary political debate shows widespread concern about the fate of the US manufacturing base, with urgent recommendations to strengthen the manufacturing sector and make it more competitive. But what does the evidence show about US manufacturing? The absolute number of jobs in the manufacturing sector is indeed declining, with a loss of almost 30 percent since 2000. But this decline in manufacturing jobs is not because the size of the US manufacturing base is shrinking.

Here comes what will be a first surprise to many: US manufacturing output has been growing rapidly in recent years. Real value added in manufacturing grew by 3.1 percent per year over the entire period 1960–2007. From 2010 into 2014 average manufacturing output growth was 4 percent per year.

US manufacturing output, 1987–2015

us-manufacturing-output-chart

In 2015, the absolute size of the US industrial base—total value added in manufacturing—surpassed the all-time high from 2006–07 and has continued to grow in 2016.

What about the competitiveness of the US manufacturing sector? Here is where the second surprise emerges: Contrary to widespread hand-wringing about the loss of American competitiveness, productivity in the US manufacturing sector has been growing, both absolutely and relative to other sectors of the US economy.

The broadest measure of productivity—total factor productivity, which embodies the improvement in technical efficiency via all inputs—grew 1.18 percent faster in manufacturing than in the economy as a whole between 1960 and 2014. Over the same period labor productivity in manufacturing grew 1.51 percent per year more rapidly than labor productivity in the economy as a whole. The fact that total factor productivity and labor productivity in manufacturing have both been growing faster than in other parts of the US economy means that fewer jobs are required to generate greater output.

So, while manufacturing is shrinking both in terms of absolute numbers of jobs and as a share of US domestic employment, this is not because the growth of US manufacturing activity is declining, nor because the absolute or relative productivity of US firms and workers is faltering. On the contrary, the US manufacturing base is becoming bigger than ever and the productivity of firms and workers in manufacturing leads the rest of the US economy in growing stronger.

Baily and Bosworth (2014) argue that this US manufacturing output growth has been driven primarily by one subsector: computers and electronics. However, we find that this assertion about computing as the sole driver of US manufacturing productivity is incorrect. Computers are not the only manufacturing subsector exhibiting high growth during the 1990s and 2000s. Other industries, including transportation equipment, medical equipment, machinery, semiconductors, communications equipment, and motor vehicles, all grew at rates well above the manufacturing sector average (Moran and Oldenski 2014).

What Is the Relationship Between Globalization and the Evolution of US Manufacturing?

Global engagement is an important element of US competitiveness. Here is the third surprise: Increased offshoring of manufacturing by US multinationals is associated with increases in the size and strength of the manufacturing sector in the United States.

That is, an increase in outward foreign direct investment (FDI) by a US firm is associated with an increase in domestic US activities by that same firm. Specifically, increases in four variables (employment, sales, capital expenditures, and research and development or R&D) in foreign affiliates of US firms are all positively associated with increases in five variables in the United States (employment, sales, capital expenditures, R&D, and exports).

When a US firm increases employment at its foreign affiliates by 10 percent, employment by that same firm in the United States goes up by an average of 4 percent (Moran and Oldenski 2014). Capital expenditures and exports from the United States by that firm also increase by about 4 percent. R&D spending increases by 5.4 percent.

Imposing penalties on outward FDI by US multinationals will not expand domestic investment or stimulate more R&D at home, let alone make US firms more competitive.

Trade and Good Jobs in the United States Looking Forward

Trade or no trade, the absolute number of jobs in the manufacturing sector is indeed declining. So where will more good jobs be found in the US economy of the future? The answer is high-performance service jobs.

Looking first at the manufacturing sector, we find that the areas for greatest job growth will not be production occupations. Instead, demand will more likely increase for more highly skilled manufacturing workers in areas such as engineering, management, finance, computer and mathematical occupations, and sales. In 2014, traditional production occupations accounted for only about 52 percent of total manufacturing employment (Oldenski 2015). In coming years, we expect that share to fall further. Overall, meanwhile, the manufacturing sector as a whole is not large, only 8.8 percent of total US employment in 2014, and as noted earlier is steadily shrinking. So while the US manufacturing sector is extremely productive and internationally competitive, it is not the most effective area to focus on when looking for sources of widespread job growth.

The same is not true for high-performance service jobs more broadly. The US services sector is already large, pays well, and is growing (Jensen 2013). Business services, for example, employ 25 percent of US workers, about three times as many as the manufacturing sector. The average business-service job pays about $56,000 a year—more than 20 percent better than the average manufacturing job. Over the past 10 years, business-service employment grew by more than 20 percent, while manufacturing employment decreased by more than 20 percent. Similar patterns are found for engineering services, legal services, and medical services.

One of the most promising routes to expand high-performance service jobs in the United States is to pursue service sector liberalization in trade agreements. Here the United States already has a strong international comparative advantage and runs a trade surplus. Hufbauer, Jensen, and Stephenson (2012) argue that US exports of services could amount to 20 percent of sales if tradable business services were sold abroad to the same extent as manufactured goods. But actual US exports of business services amount to less than 5 percent of sales because of sky-high barriers to services trade and investment. The Trans-Pacific Partnership, Transatlantic Trade and Investment Partnership, and other trade and investment agreements will enhance US global presence in high-performance services. Refusing to ratify the TPP or calling for a stand-still on trade agreements will prevent the United States from exploiting its comparative advantage in high-performance service jobs.

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