A Clear View of China and US Manufacturing

It is a fact that U.S. manufacturing employment is declining. Between 2001 and 2005, 2,677,000 manufacturing jobs were lost according to the U.S. Census. The question is the extent to which job loss is attributable to foreign trade:

➢ The value of manufacturing output in the United States continues to grow, although manufacturing is increasingly a smaller part of the U.S. economy. In constant dollars, manufacturing output for 2005, the most recent year for which full information is available, was about 7 percent higher than in 2001.

➢ The role of technology and higher productivity is a larger factor than imports in overall job loss. The numbers by different economists vary, but the consensus appears to be that two jobs are lost due to higher productivity to every one job lost to imports. Most economists note that the binge spent on capital equipment and high technology in manufacturing in the late 1990’s did not have its full impact until the post 9/11 period when companies actually figured out how to use the stuff.

➢ It is also clear that industries using low skilled labor or having a high ratio of labor to capital are the ones most likely to be forced to close or to shed jobs. Most manufacturing sectors with high valued added and complex production processes have generally maintained their employment levels or have grown in recent years.

➢ From December 2000 through December 2005, the economy added 10,424,000 non farm jobs against the 2,677,000 manufacturing jobs shed during the same period. While some of these new positions were “McJobs” as critics claim, there is substantial evidence that the majority of these new positions paid as much as, if not more, than manufacturing jobs.

➢ A survey by the Conference Board found that most U.S. foreign direct investment going into China is not for the production of products to be exported to the United States. Rather, such investment is primarily for sales to the Chinese domestic market or to South Asia. The substantial majority of U.S. foreign direct investment is still going to advanced countries.

➢ The growth in U.S. exports has also been a substantial factor in sustaining U.S. manufacturing and the impact of trade agreements has been critical to export growth.

o During the last five years of the 1990’s, when the United States effectively only had the NAFTA Trade Agreement, exports to NAFTA climbed by 52 percent versus 25 percent for overall U.S. exports. The data is similar when applied to subsequent trade agreements.

o U.S. exports to Singapore climbed by 19.4 percent during the first full year of the Treaty.

o Exports to Australia climbed by 11.4 percent the first year of the treaty (2005) and by another 12.3 percent in 2006.

o U.S. exports grew by 42.2 percent between 2001 and 2006. A cheaper dollar is important here, particularly during the last two years, but the impact of trade agreements is also a major factor.

➢ As to whether the Chinese currency is fairly valued, what is the fair value? The Economist sites Goldman Sachs, the investment bank, as having 14 different methodologies to value currencies on a bilateral basis. Of these, twelve indicated the Chinese currency is not overvalued against the dollar and the other two did not present major shifts.

What all of this suggests is that manufacturing job loss is more complex, given technology, labor-capital ratios, and the beneficial effect of export growth. There are shifts occurring within manufacturing and certainly many communities have been adversely affected. But, the U.S. manufacturing sector is now producing more than it ever has.

Concerning China, the country has considerable room for improvement, witness toy recalls, theft of intellectual property, and other maladies. But the loss of 46,000 jobs in August 2007, if correct, is not necessarily China’s gain. Some of these jobs may end up in China. Some may end up in other countries. Some may not end up anywhere else because they are no longer needed. Job loss is far more complicated than a zero-sum game.

- Doug Smith, Sr. International Business Consultant
International Trade Center