By Jeptha McNair
We’ve heard a lot of angry rhetoric centered around trade recently from our presidential candidates. Donald Trump’s central argument for his movement is that “We don’t win anymore. We use political hacks [for trade deals]. All of the people give the worst deals.” Bernie Sanders, whose supporters say never to compare with Trump, has also torn into the “stupid” trade agreements, saying “many, many Republicans and far too many Democrats… supported these disastrous trade policies. Not only job loss by the millions, but a race to the bottom so that new jobs in manufacturing in some cases pay 50 percent less than they did 20 years ago.” It is true that the United States has lost manufacturing jobs over the last few decades, from 20 million in 1979 to 12 million in 2016, while the U.S. has passed several trade agreements such as NAFTA during that time. But are trade agreements really to blame? And what, if anything, should we do to reverse this trend?
In 1953, manufacturing made up 28 percent of the U.S. economy, but in 2005, it only accounted for 11 percent. The proportion of manufacturing jobs fell at the same rate. These numbers make it sound as if the U.S. doesn’t manufacture nearly as many goods as it used to, but in fact the opposite is true. During that same time period, 1960 to 2005, manufacturing output in the United States didn’t go down, but quadrupled. The Federal Reserve Bank of St. Louis says it’s almost doubled since 1987. And even more recently, manufacturing output has increased more than 20 percent since 2009, while manufacturing jobs have only increased 5 percent in that time.
How did this happen? Mainly, manufacturers became more productive because of improvements in technology. Russell Roberts, a research fellow at Stanford University’s Hoover Institution, describes in his book “The Choice” that technology created new production processes that made workers more productive, so that more output could be produced with fewer workers and sold to the American consumers for lower prices. He says that that low-skilled foreign workers were able to adopt some of these processes as well, which not only benefitted those low-wage foreign workers but enabled American consumers to buy manufactured products at even lower prices, though it cost America some of its lower-wage manufacturing jobs.
How did this increase in manufacturing productivity at the expense of manufacturing jobs affect the American economy? We know that U.S. GDP tripled from 1970 to 2010. GDP per capita (a measure of the standard of living) increased from $12,598 in 1980 to $53,042 in 2013. Even though manufacturing jobs were lost during this time, America gained over 50 million total jobs. So while many Americans worried about the Japanese taking U.S. jobs in the 1970s, Mexicans taking U.S. jobs in the 1990s, and the Chinese currently taking our jobs, America has not only survived but thrived during our transition away from manufacturing.
“Free trade and technology allowed the country to move from agriculture to manufacturing.”
How? The U.S. has switched to service jobs. More than 80 percent of all private jobs in the U.S. are currently in the service sector. The term “service sector” covers a broad range of industries and jobs, from lawyers and doctors to computer programmers and consultants, not just low-wage jobs like those in the fast food industry that are typically associated with the service sector. This type of economic transition leads to a significant amount of displacement, but the country has been through it before. In 1900, 41 percent of the U.S. workforce was employed in agriculture. During the 1900s that number dropped drastically, and in 2000 only 1.9 percent of the employed people worked in agriculture. This change was brought about by free trade and technology-based efficiency, so in 2000 U.S. farms had much higher output than in 1900. The U.S. should be thankful that its leaders in the early 1900s didn’t do everything they could to protect the agricultural industry through limiting free trade, since its economy would be nowhere near as large or vibrant as it is today if agriculture still took up 41 percent of the workforce. Free trade and technology allowed the country to move from agriculture to manufacturing.
Now we see the economy in transition again, this time from manufacturing to service industries, but once again due to free trade and technology-driven efficiency. Whenever these two factors drive an economy into a disruption, creativity and innovation is unleashed. Ray Kurzweil, the director of engineering at Google, points out that 65 percent of Americans today work jobs that didn’t exist 25 years ago, explaining “We’re constantly inventing new things to do with our time, but you can’t really define that because the future hasn’t been invented yet.” Both the workers and the capital being used in the importing sector are freed up to be used in new ways.
“Free trade has led to a lot less manufactured products being made in America, but it has led to more manufactured products being consumed in America, with lower prices and more options.”
This all goes back to David Ricardo’s theory of comparative advantage, or as Russell Roberts calls it in “The Choice”, the roundabout way to wealth. When a country doesn’t trade with the rest of the world, it needs to produce exactly what it wants to consume. But when countries engage in trade, each country can produce what it has a comparative advantage in. For example, the U.S. and China both produce and consume computers and pharmaceuticals. If the U.S. has to give up a smaller amount of lost computer production in order to produce pharmaceuticals, the U.S. can specialize in pharmaceuticals and China can specialize in computers. Then the two countries can trade and both countries can have more of both goods than before. In this scenario, pharmaceutical companies in a sense are producing computers the roundabout way, and both countries are wealthier than before. Free trade has led to a lot less manufactured products being made in America, but it has led to more manufactured products being consumed in America, with lower prices and more options. It has also launched a booming new service sector that employs so many people and a much larger market for our exports.
I mentioned earlier that the workers in the manufacturing industry are now freed up to work in the service sector. However, it’s not that simple, and this is where the controversy lies. Some of the workers displaced by the decline in the manufacturing sector retrain and find a new job in the service sector. Others retire earlier than they had hoped. Still others become long-term unemployed. The next generation of workers is freed up to work in the service sector, but the workers already in the manufacturing sector may find themselves out of a job and unable to find one without moving or learning new skills, which is usually difficult. As The Economist recently pointed out, the losses from free trade are long lasting. However, to fix this, the U.S. can look to Germany and its system of apprenticeships to retrain workers, as well as build up our community colleges and create portable benefits like health care plans that move with workers as they change jobs. But The Economist concludes that “free trade still deserves our full-throated support”, because it allows the country to have more of both services and manufactured goods, with lower prices and more variety, and it opens up markets for American exporters. Most economists agree that these gains economically outweigh the losses.
The U.S. government under the Obama administration has negotiated two major trade agreements with the European Union and the Asia Pacific, the Trans-Atlantic Trade and Investment Partnership and the Trans Pacific Partnership, respectively. Secretary of State John Kerry is forcefully arguing that Congress needs to approve these trade agreements, saying they will lift Americans’ incomes. But the political mood of the country, as evidenced by Donald Trump and Bernie Sanders, is decidedly anti-free trade. The International Monetary Fund recently declared that the U.S. and Europe’s anti-free trade sentiments could hurt the global economy. Free trade is costing the United States jobs in the manufacturing sector, but it’s bringing renewed growth to the economy overall.