When we talk about the long-term decline in U.S. manufacturing employment, China often comes to mind. We may consider wage differentials, or perhaps currency exchange rates that accrue benefits to China. What we often don't hear is the proximate cause allowing these forces to cause U.S. trade to be imbalanced.
Recent research has shown that opening up trade with China by granting permanent normal trade relations in late 2000 might be the cause. By examining the cause of those job losses, we might assess whether those lost jobs may come back. The drop in U.S. manufacturing is no secret: Data from the Bureau of Labor Statistics show that U.S. manufacturing employment fell from 19.6 million in 1979 to 13.7 million in 2007 (to use a date that pre-dates the Great Recession). And more than half of those job losses occurred in the years immediately following the relatively mild 2001 recession. Why so many after that downturn?
We have an answer why the job losses occurred at that particular time. Prior to late 2000, when the U.S. granted permanent normal trade relations (NTR) with China, the U.S. had granted temporary NTR. That status needed to be renewed periodically. The threat of increased tariffs in between renewals caused firms in both China and the U.S. to be wary of establishing permanent relationships. Note that the threat of tariffs was a hindrance, not any actual, significant tariffs or trade barriers in place.
But once permanent NTR relations were established, U.S. importers became more comfortable with long-term sourcing arrangements with Chinese firms and began to import more, largely due to the lower wages of lower-skilled labor in China. Chinese exporters, meanwhile, gained confidence that the U.S. would remain a long-term market and began investing more in those export-sensitive businesses. Once companies on both sides of the Pacific began to trade more freely, the job losses in lower-skilled U.S. manufacturing began. Jobs were lost not only at the U.S. manufacturers themselves, but also at their suppliers and distributors. These factors helped explain the well-documented "jobless recovery" following the 2001 recession.
Is this the case now, with a recovery hallmarked by relatively few jobs created caused by trade with China, whether due to NTR, wage differentials or currency exchange rates? U.S. manufacturing employment since the end of the Great Recession in June 2009 has been basically flat, increasing by roughly 300,000 jobs to 11,950,000 in January 2013, which is not a statistically significant change. But manufacturing output, according to a Productivity and Costs report from the BLS, increased by an average annual rate of 5.2% since the end of 2009, far greater than the average annual growth of real GDP of 2.1% in that period. Productivity gains have allowed U.S. manufacturers the ability to increase more with fewer inputs of labor hours.
China may have been responsible for the drop in manufacturing employment prior to the Great Recession. But since then, this competition likely prompted a heightened need for productivity gains by U.S. manufacturers to keep costs controlled. As a result, U.S. manufacturing has emerged as a more competitive global force, particularly in high-value added products rather than those dependent on lower-skilled labor.
This has benefited the U.S. economy and the country's position in global trade and exports, but it hasn't resulted in many jobs. The people U.S. manufacturers do need are workers with more technical skills with backgrounds in science, technology, engineering and math, including computer programmers to operate high-tech equipment. That shift in the type of workers needed is an arguably equally large shift in U.S. manufacturing employment trends as is the shift in global trade. The bottom line: Those lower-skilled factory jobs might not come back any time soon.