Monday, February 27, 2017

Trump was right: China ate America's manufacturing jobs.

Freakonomics podcast featuring labor economist David Autor:
  • Between 1991 and 2013, Chinese exports grew from roughly 2 percent of the world’s total to nearly 20 percent.

  • ...There are two big differences of the last two decades relative to earlier periods. One is that a lot of our trade prior to China’s rise, a lot of it was North-North trade. You know, trading between wealthy nations. So you know, we sell aircraft engines to France and we buy cheese and wine and Renaults or maybe we buy Mercedes from Germany. And so it’s a lot of high-skill people trading high-skill goods and we’re trading on the basis of taste. Like, “I like your vehicles. You like my aircraft.” It’s not trying to see who can make the cheapest version of X, Y, or Z. We’re often focusing on a set of expensive goods in which we all are differently good at different subsets.
  • So when the United States trades with the developing world, we’re going to typically export skill-intensive products: aircraft engines, electronics, movies, and TV programs and things that use a lot of highly educated labor. And we’re going to tend to import low-skilled or what we call labor-intensive products like you know footwear and textiles, leather goods, things that require a lot of hand assembly. 
  • TRADE BENEFITS US SKILLED WORKERS AND CONSUMERS:  And so what does that do? Well, when we export those high skill-intensive goods we’re basically raising demand for skilled or educated workers in the United States. When we import those labor-intensive goods, we’re going to reduce demand for blue-collar workers, who are not doing skill-intensive production. Now we benefit because we get lower prices on the goods we consume and we sell the things that we’re good at making at a higher price to the world. So that raises GDP but simultaneously it tends to make high-skilled and highly educated labor better off, raise their wages, and it tends to make low-skilled manually intensive laborers worse off because there is less demand for their services – so there’s going to be fewer of them employed or they’re going to be employed at lower wages. So the net effect you can show analytically is going to be positive. 
  • BUT HARMS U.S. UNSKILLED LABOR: But the redistributional consequences are, many of us would view that as adverse because we would rather redistribute from rich to poor than poor to rich. And trade is kind of working in the redistributing from poor to rich direction in the United States. The scale of benefits and harms are rather incommensurate. So for individuals, you know, I have less expensive consumer items because of imports from China. But it hasn’t affected my employment or my wages. For many others – on the order of at least a million U.S. manufacturing workers – it meant the end of their jobs and in many cases the end of their industries.
BOTTOM LINE:  Trade helped U.S. skilled workers (by increasing demand for their services) and consumers (by giving consumers cheaper goods), but hurt U.S. unskilled workers (by reducing demand for their services).  In a frictionless world, they would move to their next best alternative (e.g., Texas or Tennessee), but instead they are moved out of the labor force and into the safety net (e.g., medicare, medicaid, early retirement, disability insurance, food stamps, and TANF).

Interesting closing thoughts by David Autor, which seems to echo President Trump's campaign:
I think the other thing that we have to recognize, and that economists have tended not to emphasize is that jobs aren’t purely income. They are part of identity. They structure people’s lives. They give them a purpose and a social community and a sense of relevance in the world. And I think that is a lot of the frustration that we see in manufacturing-intensive areas. We saw a lot of that actually in the recent election. People feel like their place in the universe, or at least in the economy, has really been kind of reduced, made less valuable. And I think that that’s costly even beyond the direct financial costs.


  1. Trade has been an important economic power over the last few decades, and the deepening of the United States’ ties with China is one of the most important developments in global economics of the last generation.
    If there is one thing Donald Trump seems sure about, it is that the United States is getting a raw deal from China and I have to agree with his sentiment but would note it isn’t that simplistic and China alone can’t be blamed for the state of manufacturing in the United States.
    I would tend to think that an Economist that is viewing and/or analyzing the United States’ economic relationship with China, would find that Trump’s accounting of its dysfunctions contains both appropriate, truthful complaints and elements that completely misstate how things work between the world’s largest and second-largest economies.
    Trump’s agenda, his position on trade and manufacturing is crystal clear. “I believe strongly in free trade, but it also has to be fair trade,” he said in his address to Congress Tuesday night. He called for corporate tax reform and export incentives, and he lashed out at Nafta and China for draining America’s manufacturing base.
    American manufacturing’s most advanced sectors remain big employers, and much of their workforce reduction stems from predatory competition from both high and low-wage countries, as well as offshoring by American conglomerates. And the trade-war pessimists overlook the unparalleled, yet overwhelmingly ignored, leverage America holds over the global economy.
    While low-priced, low-cost, labor-intensive goods frequently come to mind when Americans think of job replacement imports, the more capital and technology concentrated divisions of manufacturing have not been immune but are far less impacted than manufacturing achieved by cheap labor. Sectors like motor vehicles and parts, pharmaceuticals, telecommunications equipment, nonelectrical machinery (like machine tools, farm machinery and power-generating turbines) and industrial chemicals add up to nearly half of manufacturing’s enormous, chronic annual trade deficits nowadays. Yet such sectors still employ millions of Americans.
    Having said that a recent Commerce Department report indicates that in 2014 trade shortfalls alone resulted in the decline or loss of 200,000 jobs, both in the industries themselves and throughout their American supply and logistics chains.
    I’m sure many economists have varying degrees of reality when it comes to trade and the relationship that American and China have demonstrated thus far. I however, overall believe that Trump is right on the money here. Nothing less than an actual tariff or the equivalent is ever going to stop China from utilizing the international trading system to America’s disadvantage.
    Trade matters, big-time. And until trade is properly addressed our economy will never truly be healthy again. Jobs are what people understand and jobs are what people relate to and people recognize that there has been a decline of jobs, unemployment is rising and Americans are struggling to survive. But what a lot of people fail to understand is that jobs and unemployment in respect to the current budget fight, and the anguish over our ridiculously mounting national debt, are intimately connected to trade. So Trump is onto something greater than both economists and American people will credit him with.


  2. As we have already seen Trump is not living up to his promises that he made and the affect is already seen on the market, it is highly unlikely that we are going to see this change anytime soon. So, we need to be fully prepared. I trade with TradeWiseFX and through them; I am able to do things extremely well with excellent conditions.

  3. Ineffective government trade/investment policies have enabled countless American manufactured products to be swallowed up by foreign investors that are reducing the economic wealth and labor force on American soil. The “Rust Belt”, defined as the middle states hardest hit economically by the disintegration of industrial manufacturing, sent a loud and clear message in the 2016 election to bring back manufacturing and to make it in American to “Make American great again”. This was an important step to reform trade policies that were originally developed to helpt disadvantaged countries that are now in better global economic positions and to revise agreements to promote the American economy.
    According to Dealogic, “to date, there have been 102 Chinese outbound mergers-and-acquisitions deals announced this year, amounting to $81.6 billion in value. That is up from 72 deals worth $11 billion in the same period last year.” (Crowe 2016) Alarming? Yes it is! Forbes concurs, adding “the Chinese are using American money from its trade deficit and putting it to use to acquire American brands.” (Rapoza 2013) Their “acquisition agenda” is to buy out existing brand names that have low valuations and then integrate their products into the product line, making is seamless to distinguish foreign products from American products. A few notable lucrative acquisitions include, Starwood Hotels, Motorola, SmithField Foods and AMC Theaters. Economists estimate China has the potential to invest over $500 billion spanning the next seven years. (Rapoza 2013)
    Trade agreements like NAFTA (North Atlantic Free Trade Agreement), TPP (Trans-Pacific Partnership) as well as foreign investors tax loopholes (like letting foreign investors earn interest in the U.S. tax free, as long as they do not reside in the U.S (Richman 2017)) have undermined the American workforce and pickpocketed wealth generating investments from being reinvested in American, and instead the benefits result overseas.
    This has been damaging to the U.S. economy because not as many American products are competing globally in the export market which in turn lowers trading and revenue values and in turn means less jobs for Americans, resulting in the recession. Government policies have remained weak and overlooked in regards to protecting American industry in foreign buy-outs and have instead favored selling American businesses across the border. This has been a driving force in the decline of the rust belt and decay of the American Manufacturing sector.
    In order to regain America’s manufacturing sector and escalate global exports, the American manufacturing profile is in desperate need of restructuring. It is economically unfeasible to unbalance the free market by downsizing manufacturing and ramping up service sectors. We have experienced depressions when economic sectors are not within balance. High school graduates have less earnings potential post-graduation because shifts have been made in education goals that eliminated trade skills development in high school. The future generation is instead forced to accumulate long-term college loan debt by focusing education on being college ready not workforce trade skill ready. This has unbalanced the workforce with more skilled professionals overwhelming the service sector while a deficit exists for workers in the trade, union and manufacturing sectors. These trends have shown less economic growth and unconsummated wealth destruction specifically among the middle class.
    Trump was correct that China ate America’s manufacturing jobs.