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Millions of lost American jobs show the high cost of unfettered free trade

Donald Trump’s assault on free trade has elicited almost universal pushback in defense of the global trading system. The president summed up his critique of trade in his inaugural address, describing its impact as “American carnage” in the form of “rusted out factories scattered like tombstones across the landscape,” after “one by one, the factories shuttered and left our shores, with not even a thought about the millions and millions of American workers that were left behind.”

Last year, Trump’s critique was validated in a study by MIT Professor David Autor and colleagues entitled “The China Shock,” which focused upon the extensive damage wrought by that one nation upon the American manufacturing sector.

The free-trade establishment conceded only that “some lose out,” referring to unemployed U.S. factory workers.

Last November, another Autor-led study, “Foreign Competition and Domestic Innovation,” found that Chinese import competition has had a “strongly negative” impact on U.S. innovation, as measured by patents produced. This conclusion is devastating, since innovation is the lifeblood of progress. The free-trade establishment has not responded.

In “The China Shock,” Autor’s team found remarkable and long-lasting damage to factory employment. From 1999 to 2011, the U.S. lost 560,000 manufacturing jobs in industries directly impacted by Chinese imports and another 425,000 manufacturing jobs in industries indirectly impacted (as suppliers to, or purchasers from, directly impacted industries) — together making up almost 20% of the decline in U.S. manufacturing jobs over the period. In addition, another 1.0 to 1.4 million nonmanufacturing jobs were lost in the national economy.

While acknowledging the Autor team’s findings, The Economist magazine published a robust defense of trade in a 16-page special report entitled “Why they’re wrong, A special report in defense of globalism,” titling the opening segment of its special report “An open and shut case.”

The magazine issued the standard “some lose out” disclaimer, even while acknowledging that more than 15% of non-college-educated American men of prime working age are unemployed, which is “partly linked to a long term decline in manufacturing.” The report observed that more than one-third of them live in poverty, rendering “losing out” as cruel understatement indeed.

A growing body of recent research is finding tremendous problems among this demographic. “Men Without Work” by Nicholas Eberstadt came out just before Election Day, painting an alarming picture.

Forbes magazine simply rejected the China-Shock findings out of hand in a September article entitled “The Number Of Jobs Lost To Trade With China Is Zero, Zip, Nada.” Many have commented rightly that many, if not more, manufacturing jobs have been lost to factory automation. At least, under automation, we retain production, if not jobs.

While free trade economists may be able to react clinically to the human tragedy endured by those who “lose out,” considering it just a cost of progress, they cannot ignore declining innovation which threatens U.S. economic dynamism overall. Manufacturing plays a huge role in innovation. The study authors point out that three-quarters of U.S. patents arise in the manufacturing sector.

While the innovation study itself did not investigate the specific reasons that innovation declined in the face of Chinese imports, it suggested one possible reason is that R&D and manufacturing are codependent and that, when they are separated with manufacturing offshored while R&D remains a U.S. headquarters function, necessary close coordination is lost.

It may be that Apple’s designed-in-Cupertino-and-manufactured-in-China model may not be a viable long term strategy. One of the innovation study authors, Harvard Business School Professor Gary Pisano, makes exactly this argument in extensive work with HBS colleague professor Willy Shih.

Nevertheless, the study authors find it difficult to criticize free trade theory. However, if Pisano and Shih are right, then logic suggests that corporations will move to reunite these two functions, either by bringing factories back onshore or by sending R&D centers overseas, with the consequence that American carnage will continue and reach the higher skill levels employed in those centers, if not corporate headquarters.

The economics, given the enormous differential between U.S. factory wages and such wages offshore — less than $3 per hour in China, Mexico and other overseas markets — militate strongly in favor of continued offshoring. So, it will require some significant exceptions to free trade orthodoxy to stem and reverse the tide (a 20% “border adjustment tax” is under consideration among Republicans). Otherwise, we all lose, not just some unlucky factory workers.

As appeared in Investor’s Business Daily on Feb. 6, 2016.


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