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Direct Results - Where did the jobs go?

Where did those 17 million missing jobs go?

A hint lies in the curve on the graph showing manufacturing employment from 1979-2014, reproduced here:

Even to the untrained eye, something jumps out:  in 2001, there is a sharp break in the curve, with employment declining at a sharper rate.  At the same time, we see a similar, but upward break in the curve for net Chinese exports to the United States, in the figure reproduced here:

 

This relationship is made clearer when U.S. manufacturing job losses and net Chinese exports to the U.S. are displayed together.  The following chart does so, with the trade in goods deficit (U.S. exports to China net of U.S. imports from China) expressed as a negative number:

 

Again, to the untrained eye, there is a strong relationship between manufacturing job losses and the Chinese trade in goods deficit.  It is not much of a leap to connect the dots and conclude that the jobs went to China, with goods formerly produced in the U.S. being produced in China for export to the U.S.  It turns out that there is some social science research that confirms this conclusion. 

The Pierce & Schott Study

Two economists at the National Bureau of Research, Justin R. Pierce and Peter K. Schott, considered this question in a December 2012 paper, “The Surprisingly Swift Decline of U.S. Manufacturing Employment.” [i]  In particular, they considered whether the sharp decline in U.S. manufacturing employment from 2001 was linked to the United States’ granting permanent normal trade relations (“PNTR”) status to China via an act of Congress in October 2000. 

Prior to that action, the application to China of the lower tariffs flowing from normal trade relations (“NTR”) status was uncertain, because they were granted on an annual basis and were politically contentious.[ii]  The authors investigated whether there was a link between the losses of U.S. manufacturing employment and the elimination of uncertainty with respect to PNTR status. After an extensive data review and analysis, they concluded that, indeed, there was. 

In particular, they looked at products for which there was a large difference between the NTR tariff and the tariff the product would face if NTR status were not renewed (the “NTR gap”).  They hypothesized that the removal of uncertainty regarding these products’ tariffs through the granting of PNTR status could result in market shifts. 

 

[i] Justin R. Pierce and Peter K. Schott, “The Surprisingly Swift Decline of U.S. Manufacturing Employment.”  NBER Working Paper Series, Working Paper 18655. National Bureau of Economic Research.  Cambridge, MA December 2012.  http://www.nber.org/papers/w18655.

 

[ii] The United States utilizes two tariff classification: “NTR” or “column 1” tariffs applicable to countries with which it has normal trade relations (including countries that are members of the World Trade Organization) and higher, “Non-NTR” or “column 2” tariffs that are applied to countries with which it does not (e.g., Iran, Cuba, and North Korea).  The Trade Act of 1974 gives the President the power to temporarily grant NTR status to countries with non-market economies, subject to potential Congressional disapproval.  China was granted temporary NTR status in 1980 (shortly after the “reform and opening” initiated by Deng Xiaoping in 1978).  Following the Tiananmen Square events of 1989, the annual renewals became contentious and uncertain; if either the President failed to act or Congress overturned his action, large increases in tariff rates could result.    The October 2000 legislation granting permanent NTR status to China removed the uncertainty and paved the way for China’s entry into the World Trade Organization in December 2001.  Pierce and Schott found that there was no significant change in tariffs applied to Chinese imports; only the uncertainty of renewal of NTR status was removed.  Id., 10. 

 

Pierce and Schott's key findings included the following:

  • PNTR status provided Chinese producers with incentives to invest in entering or expanding in the U.S. market, putting further price pressure on U.S. producers.  The same incentives applied to U.S. firms for investing time and resources in locating or establishing Chinese suppliers, encouraged U.S. producers to exit, and discouraged U.S. producers from entering markets. 
  • U.S. imports grew in exactly the same group of products where the U.S. manufacturing employment losses occurred, and the new imports came from China, the country that was the subject of the PNTR policy change. 
  • There was a strong association between products with higher NTR gaps and the value of imports from China, the number of U.S. firms importing from China, and the number of Chinese firms exporting to the U.S.  The authors illustrated the extent of China’s “import penetration,” that is, the percentage of total U.S. domestic consumption attributable to imports, in the following chart:

 

  • Where PNTR status pushed upstream supply offshore to China, U.S. customers of those suppliers often followed them there to take advantage of lower transportation and other costs. 

With regard to manufacturing job losses, the authors found:

  • Much of the manufacturing job loss was caused not directly, but rather when a U.S. firm’s downstream customers disappeared – either moved to China or went out of business.   Other data suggested that companies competing directly with China may simply go out of business rather than move production there.
  • There were employment losses in upstream and downstream industries stemming from simultaneous offshoring of several stages of a supply chain. 
  • There was a significant relationship between the reduction in tariff uncertainty flowing from PNTR for China, on the one hand, and losses in U.S. manufacturing employment on the other, for up to six years after the 2001 peak: employment losses were highest in the industries that experienced the largest reduction in the threat of tariff hikes. 
  • The negative impact of PNTR was greater for production workers (-17% from 1997-2007) than for non-production workers (-4.6% from 1997-2007).
  • PNTR status for China was associated both with increased manufacturing job destruction and decreased manufacturing job creation, and helped to explain the widely recognized “jobless” aspect of the recovery from the 2001 recession in manufacturing.
  • Without PNTR status for China, manufacturing employment in the U.S. would have gone up 10 percent between 2001 and 2007, instead of declining 15 percent – a 25 percent swing and a difference of some 4 million jobs.

The authors also examined the data to consider whether the manufacturing employment declines could be caused by non-trade-related, technical changes replacing low-skilled labor with human or physical capital.  They concluded not, for several reasons:

  • The job losses were concentrated in industries with high NTR gaps, and persisted even when technology and capital factors were controlled for;
  • The employment losses were concentrated in the period after 2000; and
  • PNTR coincided with increases in U.S. imports from China compared with all other trade partners. 

In sum, the analysis of Pierce and Schott shows that the dramatic decline in U.S. manufacturing employment beginning in 2001 during the “jobless recoveries” from the 2001 and 2008 recessions, resulted from the removal of uncertainty regarding U.S. tariffs on Chinese goods and the resulting shift of U.S. manufacturing production to China for export to the United States.[i]   The destruction of jobs and inhibiting of new jobs was felt up and down the supply chain as suppliers lost U.S. customers and U.S. customers followed suppliers to China. 

 

[i] (Another important, but not sufficient, condition was already in place:  China’s previous action permitting foreign investment and establishing special export production zones via the “reform and opening” begun in 1978 and confirmed with Deng Xiaoping’s trip to the southern provinces in 1992.)

 

The ITIF Study

Similar conclusions to those of Pierce and Schott were reached in a March 2012 report published by the Information Technology and Innovation Foundation (“ITIF”).[i] Titled “What Experts Are Missing about American Manufacturing Decline” and authored by Robert D. Atkinson et al, the report considered job losses in American manufacturing in the decade of the 2000s, from January 1, 2000 through December 31, 2010.  In particular, the report considered the causes for American manufacturing suffering its worst job performance in history, losing 5.7 million jobs, a decline of 33 percent that exceeded the rate of loss during the Great Depression.


[i] Robert D. Atkinson, Luke A. Stewart, Scott M. Andes, and Stephen J. Ezell.  “What Experts Are Missing about American Manufacturing Decline,” (report, The Information Technology and Innovation Foundation, March 2012). 

http://www.itif.org/publications/worse-great-depression-what-experts-are-missing-about-american-manufacturing-decline

Correcting for errors in U.S. government reports, the authors found significant declines in U.S. manufacturing output and resulting losses of employment, and concluded that the key factor accounting for these losses was the growth of the U.S. trade deficit in manufactured goods

The authors noted a previous study by the Congressional Budget Office [i] that found that there is a strong correlation between job losses in manufacturing subsectors and the subsector’s “import penetration,” that is, the percentage of total U.S. domestic consumption attributable to imports.


[i] David Brauer, “Factors Underlying the Decline in Manufacturing Employment Since 2000” (issue brief, Congressional Budget Office, December 23, 2008), http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/97xx/doc9749/12-23-manufacturing.pdf.  

http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/97xx/doc9749/12-23-brief.shtmli, cited in Atkinson et al at footnote 221.

As illustrated in the following figure from the CBO paper, Industries with low import penetration, such as food processing and petroleum refining, saw few job losses; industries with medium import penetration, such as steelmaking ("primary metals"), saw significant job losses; and industries with high import penetration, such as apparel, saw very high job losses:

 

Employment in Manufacturing: up in China, down in U.S.

These findings of U.S. manufacturing job losses correspond not only to Chinese exports to the U.S., but also Chinese employment in manufacturing, which was going up as that of the U.S. was going down, as illustrated in the following figure:

Not all of the new Chinese manufacturing jobs came from the U.S., but it is clear that many of them did.  Amd of course, not all of the jobs went to China.  Other countries were in play as well.  For example, the U.S. has experienced a similar excess of imports over exports with Vietnam since the adoption of the U.S.-Vietnam Bilateral Trade Agreement, which, coincidentally, also went into effect in 2001, as illustrated in the following figure: 

Furthermore, other factors such as the adoption of robotics and automation no doubt contributed to the job losses.  However, they cannot account for the lion’s share of the losses.  This was the conclusion of the authors of the ITF study, and the Pierce and Schott study controlled for those factors and still found the controlling factor to be the granting of PNTR status to China. 

Key Finding:

In sum, we can fairly conclude that most of the manufacturing job losses occurred after 2000, most of those lost jobs went offshore, and most of the offshored jobs went to China. 

We now consider the impact of those job losses industry by industry.

GO TO Industry-by-Industry Review.

News and Events

May 15, 2014, Ontario, CA - MIAA's founder, Jim Stuber, delivered the keynote address at the 20th annual World Trade Conference sponsored by the U.S. Department of Commerce and the California Inland Empire District Export Council in Ontario, California.  To view the conference agenda, click here:

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May 7, 2015, Radnor, PA.  MIAA's founder, Jim Stuber, appeared as the guest of host Richard J. Anthony, Sr. on The Entrepreneur's Network TV at Radnor Studio 21.  The program featured a discussion of the problems caused by offshoring manufacturing and white collar jobs and how consmers can solve the problem with their spending decisions. 

Studio 21 has made the program available for viewing here:

https://youtu.be/UIOwBD6-1pk

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