Debunking Trump on trade

This might come as a surprise to President Trump, but the 2015 Manufacturing and Logistics Report Card, published by Ball State’s Center for Business and Economic Research (CBER) and Conexus Indiana, found that about 87% of manufacturing job cuts are due to productivity gains, including better supply chains, more capital investment, and advanced technology such as robots. It also found only 4% of manufacturing jobs have been lost to international trade through outsourcing since 2000.

The study was done two years ago but re-released after the 2016 presidential election exposed various misconceptions about trade. We spoke to Michael J. Hicks, director of CBER and the George and Frances Ball distinguished professor of economics at Ball State, for his take on those manufacturing misconceptions.

IB: When the study was re-released, you noted there are major misunderstandings among the public and the media about the manufacturing sector. What are they?

Michael J. Hicks

Hicks: The study that we’re going to talk about was conceived almost two years ago and published in June 2015. At that time, the presidential debates on trade hadn’t started, and it was apparent there were a number of people, primarily here in Indiana, who were confusing job losses in manufacturing over the previous decade by attributing them to trade and missing the larger productivity role that I think all the economists in the world would attribute it to.

IB: We’ve just inaugurated a man, President Trump, who got elected president in part by arguing that the American political establishment has engaged in economic surrender, and that the outsourcing of manufacturing jobs is an example of it. Yet Ball State’s manufacturing and logistics report card says the vast majority of manufacturing jobs have been lost through productivity gains made possible by advanced technology. Does that suggest that outsourcing is really nothing to worry about?

Hicks: No, I think a more nuanced approach to it is necessary. Absolutely, trade and competition with other firms, be they in Illinois or Mexico, or Maine, or China, can cause firms to close down. Those tend to be very concentrated. If you’re in Wisconsin, Illinois, Indiana, Michigan, or Ohio, we’ve seen now four or five decades of job losses in manufacturing in concentrated places. And so that looks a lot like trade, but the fact is that the United States today is producing more goods, more manufactured goods, than at any other time in its history.

In Wisconsin, the peak-manufacturing year is 2015, and we know for sure it was 2015 or 2016 in Indiana, probably 2016 when the data comes in, so free trade is not causing a reduction in U.S. manufacturing production. If we actually had less production, maybe that would be a major cause of worry, but we’re actually making more today than we ever have before, so it surely cannot be trade.

IB: You can certainly argue that a lot of jobs exist because we sell products overseas.

Hicks: Well, there are two parts to that. It’s worth acknowledging that if competition from foreign countries accelerates but does not cause automation, maybe I’m going to have to get better at what I do. Economists have a special term for that. It’s called economic growth — getting better at what you do. After all, the United States is not trading with Mars. In the U.S., peak-manufacturing employment nationwide was in the fall of 1977, almost 40 years ago. Over that time we’ve lost 7.5 million manufacturing jobs but we have gained 9.5 million logistics jobs, so in moving those goods around the country we’ve seen a significant increase in business services and people in working in computer technology. For every manufacturing job we’ve lost, we’ve gained about five or six more new jobs since 1977, maybe as many as eight more, and it’s been in part facilitated by the fact that traded goods tend to be cheaper. That’s why you buy them, so if something is cheaper that’s been imported from Mexico we’ll eventually shift our consumption to those Mexican items and use income from our households to buy something else.

IB: The president has signed an executive order stating his intention to renegotiate the North American Free Trade Agreement between the U.S., Canada, and Mexico. In your estimation, is this a good idea given how things have played out since NAFTA was passed in the 1990s?

Hicks: I have absolutely no concern with renegotiating a trade deal. The only thing that a trade deal does, almost the only thing a trade deal does, is eliminate barriers to trade between countries. The renegotiation of the trade deal is more likely to reduce barriers between the United States and Mexico or between the United States and Canada, thus facilitating more trade.

If he goes back and raises barriers, then he’s really not negotiating a trade deal, he’s unilaterally raising trade barriers. I don’t want to confuse political rhetoric or politics with policy. If we could renegotiate the trade deal with Mexico to reduce barriers to American goods going into Mexico, we would be better off. If we would do the same thing with China, we would be better off simply because free trade makes us better off, not because un-free trade is hurting us in some way.

IB: If we, as Trump promised to do, impose higher tariffs to punish American companies that close down plants here and move those jobs to low-wage economies, could that spark a trade war or is that a narrow enough area where it would not have a broad impact?

Hicks: We have no legal powers to punish a company for relocating from Indiana to Illinois or from Wisconsin to Ohio, and we don’t really have any way to punish a company relocating from Wisconsin to Mexico, except by raising barriers to trade on those goods being reimported into the United States. If we were to raise some sort of barrier to trade, we could not pick an individual company out because it violates the Equal Protection Clause of the Constitution. You’d actually have to raise it on all of those products, so doing that could easily spark a trade war. Typically what happens is the country that is aggrieved in this circumstance would simply arrange some sort of barrier to trade or something that hurts the United States more. So they’d raise the tariff on corn or soybeans and it will be an attack on a political basis, not a product basis. That should be a very deep concern for American consumers and American producers.

(Continued)

IB: What has been the impact of advanced technology on workers’ ability to earn a good wage?

Hicks: That’s a nuanced argument, as well. As it turns out, if you look back at occupations in 2010, the ones that shrank in the production fields, the low-wage jobs of $10 or $12 per hour, lost four out of 10 jobs. They just disappeared. Those jobs that were paying that back in 2000 are almost half gone. The higher-paying jobs over $20 an hour actually increased over the same time period, so what automation tends to do is keep in place more skilled workers because they are maintaining the equipment — they are operating more sophisticated equipment — and it kills lower-wage jobs. But the combination of the threat of automation with the threat of offshoring has probably kept wages down for workers in those categories, and that affects the supply of workers in low-wage categories in many Midwest towns. The rapid move in automation is as big a player in the angst that people are feeling about lost manufacturing jobs.

IB: There is a school of thought that says we should allow those low-skill, low-wage jobs to leave and focus on the high-skill, high-wage jobs here. Is that necessarily a bad argument?

Hicks: No, the classic economic explanation of trade came about in a book in 1815, where two countries produce different competitive advantages. Well, we’re a country with a huge infrastructure investment. We spend $125,000 to $250,000 on a kid graduating from high school. We have vast trading networks, stable electricity, ubiquitous broadband, all these great things that give us a comparative advantage in really high-tech, high-quality items, and large agricultural establishments and great information technology-related firms. We’re just not ever going to have a comparative advantage with Mexico on cheap stuff. We would be much better off by outsourcing those jobs there and concentrating on the really high-end stuff that we can produce. At the same time, the Mexicans would be better off and consequently buy more American goods if they could develop that part of their economy. That’s the classic story of trade.

What happens is that we have so many workers who are not able or are unwilling to learn skills to survive as they change jobs and they tend to be clustered in smaller towns and rural places where it becomes a political problem when really it’s a workforce education problem that’s 30 or 40 years old.

IB: This seems to be one of those areas where the good news is that the people spreading the bad news are wrong. One piece of good news from your study is that younger people, to a greater extent, realize that these jobs are not as dumb, dirty, and dangerous as they once thought, and with baby boomers in the process of retiring there are opportunities for them to fill those jobs. Am I overstating that?

Hicks: No, that’s the great irony. The fact that we’re losing manufacturing jobs also corresponds with a dramatic increase in demand for new workers. The average manufacturing worker now has been to college, has had a few courses at least. That means there are a lot of baby boomers moving out of the labor force along with millennials and Gen Xers moving in, but because we went through a very long period without employment growth, we didn’t get a lot of new hires so there is a big age gap in manufacturing with a lot of baby boomers retiring.

In many states in the Midwest, the turnover in manufacturing employment might equal the entire age cohort each year of kids graduating from high school. So there should be abundant manufacturing jobs. The problem is that out of every 100 kids who graduate from high school, 50 go to college, and 10 don’t graduate. So there are about 60 kids there who might be prime targets for manufacturing employment, but they are going to have to get job skills and certificates post secondary, post high school, to really make them competitive in the short run. Then they are going to have to keep learning, to have an enthusiastic ability to adapt over the next 40 to 50 years. That was the hallmark of American manufacturing a century ago, but we’ve probably lost track of that in recent decades. Maybe we’re not as focused on the continuous learning amongst manufacturing employees, but that’s really what we’re going to have to do.

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