Home The Washington Diplomat March 2017 Trade, Automation, Cheap Wages Abroad Conspire to Alter U.S. Economic Landscape

Trade, Automation, Cheap Wages Abroad Conspire to Alter U.S. Economic Landscape

Trade, Automation, Cheap Wages Abroad Conspire to Alter U.S. Economic Landscape

Photo: Tama66 / Pixabay
President Trump has blamed countries such as China and Mexico for the erosion of U.S. manufacturing jobs, but the industry has been steadily declining for decades.

As a presidential candidate, Donald Trump struck a protectionist, populist tone that appealed to Rust Belt blue-collar workers but instilled fear among multinational companies, foreign governments and free trade advocates. Those fears were apparently well founded.

Since assuming office, Trump has wasted no time railing against the perils of globalization. He’s threatened to slap punitive tariffs on key economic partners such as Mexico and China, named and shamed companies that outsource their operations to foreign countries and blasted multi-national trade deals like the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP); the latter he formally withdrew from and the former he’s vowed to renegotiate. Trump blames these trade deals — and the global competition they fostered — for widespread manufacturing job losses in the United States.

But the question of why manufacturing jobs have shifted is as murky as global trade itself, which, in an interconnected 21st-century world, is not a zero-sum game that neatly conforms to blustery political rhetoric.

Tangled Web

Changing trade policy does not have blowback effect on one area. It has dozens of consequences, many of which are unpredictable and lead to further repercussions. Punishing trading partners such as China and Mexico invariably affects American consumers and workers who depend on an intricate global supply chain that cuts across borders and trade barriers.

Over the years, U.S. manufacturing has innovated, focusing less on low-cost goods and more on complex, sophisticated products such as computers and airplanes that require multiple components. The automobile market is a prime example of this highly integrated supply chain. Some 35 percent of “American-made” cars are, in fact, made with imported components from Mexico, China, Canada, Germany and other nations. Likewise, “Mexican-made” cars are often made with American parts that support thousands of American jobs.

In the Dec. 2 article “Trump’s Tough Trade Talk Could Damage American Factories,” the New York Times pointed out one such factory that stands to lose from punitive tariffs: Michigan’s First Class Seating, whose recliner seats for movie theaters rely on imports from China for their fabric, plastic cup holders, bolts, screws and other parts. A 45 percent tariff on Chinese imports, as Trump has suggested, would force companies such as First Class Seating to cut American jobs and pass the increased costs onto consumers.

That in turn could stunt economic growth and lead to job losses in other industries. For instance, apparel (including Trump’s own clothing brands) is often made in low-cost countries such as China. If tariffs raise the price of those clothes, millions of American consumers may balk at having to pay twice as much for a shirt at Walmart in order to preserve a negligible amount of American manufacturing jobs. Moreover, if households cut back on buying clothes, it could threaten thousands of retail jobs in the U.S.

Beyond the fact that the cost of import tariffs often trickles down to American consumers and hurts workers in firms that rely on global trade, many other variables are at play. For instance, companies in nations that don’t impose hefty import tariffs can access the global supply chain more cheaply — and thus sell their wares to Americans more cheaply — thereby gaining an edge over their U.S. competitors. Additionally, targeting nations such as China or Mexico doesn’t necessarily shift production to the United States. It would simply migrate to other low-cost places such as Vietnam, Bangladesh and Africa. American workers may also balk at the kind of physically demanding, repetitive factory work counterparts in the developing world embrace for low wages.

Moreover, any sudden tariff hike by the Trump administration would likely face legal resistance at the World Trade Organization (WTO). If the U.S. erects protectionist walls, companies in Europe and elsewhere may start looking for new trade partners in investment-hungry nations such as China. And it’s likely that China would fight back with tariffs of its own, damaging major U.S. exporters such as Boeing. Most economists agree that everyone loses in a global trade war, which could plunge the U.S. into a recession.

Shift to Services

As for American manufacturing, there is no doubt that the industry has shed jobs. According to the Congressional Research Service, the U.S. share of global manufacturing has decreased by 29 percent in the early 1980s to 18.6 percent in 2015, mirroring similar trends in other industrialized nations such as Germany and Japan. In 2010, the U.N. estimated that China displaced the United States as the world’s largest manufacturing nation, although the U.S. has steadily outperformed other high-income economies such as Britain and Canada in terms of manufacturing growth and manufacturing as a share of GDP.

China’s entry into the WTO in 2001 and the Great Recession of 2008 contributed to the over 5 million manufacturing jobs lost in the U.S. since 2000, although the sector rebounded under President Obama and is now holding steady at about 12 million positions.

But economists warn that American manufacturing is unlikely to return to its heyday for a number of reasons. For one thing, the manufacturing sector employs less than 10 percent of America’s workforce, as opposed to 25 percent in 1960. Manufacturing jobs in the U.S. peaked at 19.5 million in 1979 and have declined ever since. Developed economies like the U.S., which were built on manufacturing, tend over time to transition to service economies, with growing health care, retail and hospitality sectors. With unemployment already at historic lows, job growth has been happening not in traditional manufacturing but in areas such as food prep, customer service, retail sales and home health aides. In fact, some of the fastest-growing occupations are registered nurses and physical therapists, which require additional education but offer higher pay.

Indeed, education seems to be the dividing line in this economic evolution. According to Georgetown University’s Center on Education and the Workforce, over 95 percent of the 11.6 million jobs created since the recovery in 2010 went to workers with at least some college education, while those with only a high school diploma or less were left behind. That’s why economists say education and increased worker training are key to adapting to the changing economic landscape.

In fact, when taking higher-skilled jobs into account, the manufacturing picture in the U.S. is not nearly as bleak. With baby boomers retiring and factories increasingly relying on computers and high-tech equipment, the demand for workers with skills to operate that advanced machinery is on the rise — as are wages.

Automation Revolution

The demand for old-fashioned blue-collar jobs that required little more than a high school degree, however, has been drying up, especially in industries such as textile and furniture manufacturing. Economists say the primary culprit behind those job losses is not necessarily free trade, but automation. The rise of machines and technology has increased productivity and decreased the need for workers performing “routine” jobs that require less skill, rendering many manufacturing jobs obsolete.

Carla A. Hills, who served as U.S. trade representative from 1989 to 1993 in the George H.W. Bush administration, blames automation for taking the lion’s share of manufacturing jobs in America.

Even as U.S. manufacturing productivity hit an all-time high in 2016, she notes, U.S. manufacturing jobs have steadily declined since 1979. That’s because factories don’t need as many people now that machines can do the work — more cheaply and more efficiently.

A 2015 report from Ball State University found that trade only accounted for 13 percent of lost U.S. factory jobs while automation and other domestic factors claimed 88 percent.

Photo: SasinTipchai / Shutterstock
The rise in automation, as seen in the industrial welding robots above, has eliminated the need for many low-skill manufacturing jobs.

The trend is likely to continue. A December 2016 White House report found that over the next 15 years, 2 million to 3 million Americans who drive for a living — truckers, bus drivers and cabbies — will be replaced by self-driving vehicles.

While some economists worry about the dire effects of robots replacing humans (not only in the U.S. but around the world), others say they will create new jobs as people adjust to this new reality — just as they have during previous technological disruptions.

Harvard’s Shorenstein Center on Media, Politics and Public Policy pointed out that the invention of ATMs, for instance, did not kill banking jobs. In fact, the number of bank jobs in the U.S. has increased at a healthy clip, according to Boston University economist James Bessen, because ATM machines allowed banks to operate branch offices at lower cost, which in turn prompted them to open more branches.

Most economists agree that the jobs of the future will require education, creativity and flexibility to adapt to automation. Yet even the debate over whether global trade or automation is responsible for the erosion of manufacturing jobs oversimplifies a complex phenomenon. Economists attribute the decline to myriad factors, and finding agreement on the causes is about as elusive as finding consensus on a solution.

For Edward Alden, a senior fellow at the Council on Foreign Relations and author of the new book “Failure to Adjust: How Americans Got Left Behind in the Global Economy,” a beneficial trade policy “looks like nothing Donald Trump would implement.”

In a phone interview with The Diplomat, Alden said that the trade-versus-automation debate is “slightly artificial.” He explained that the decline in U.S. manufacturing since the 1960s has three main causes: automation of the assembly line, global competition and the often forgotten factor of changing consumer demand.

As Alden pointed out, businesses will naturally do what it takes to remain competitive, whether it’s outsourcing their work to cheaper labor or embracing robots that are able to replace humans.

Some of this benefits consumers. Due to increased global trade, for instance, Americans have seen their choice of products grow by one-third, and lower-income households have benefited from cheaper-priced goods, according to a September 2016 report in the New York Times.

On the flip side, trade has created winners and losers. Ironically, while people on the lower end of the salary totem pole have benefitted from increased consumer choice, they’ve also been hit hardest by globalization.

“Across much of the industrialized world, an outsize share of the winnings have been harvested by people with advanced degrees, stock options and the need for accountants. Ordinary laborers have borne the costs and suffered from joblessness and deepening economic anxiety,” wrote Peter S. Goodman in the New York Times article.

Building Better Products and Workers

While blue-collar workers around the world have seen their fortunes plummet, Alden said that two notable exceptions to this trend are Germany and Japan, which have been better than the U.S. at stemming the depletion of their manufacturing sectors.

Economists Robert Hayes and William Abernathy explained why this might be the case in their touchstone essay “Managing Our Way to Economic Decline,” published in the Harvard Business Review in 1980. The economies of Japan and Europe generally have long been reliant on exports, forcing them to outmaneuver global competition while still employing their own workforces. Because of the threat of being undercut by lower-priced products from foreign competitors, “European managers feel they must place central emphasis on producing technologically superior products,” Hayes and Abernathy wrote.

For these manufacturers, quality has been key to their success — from Germany’s luxury BMW automobiles to Japan’s Yamaha pianos.

Photo: American Honda Motor Co., Inc.
While American manufacturing jobs in general have been in decline, the picture is mixed. Workers who can operate high-tech machinery are in demand, and many foreign companies rely on Americans to build their products. For example, over 99 percent of Honda and Acura vehicles sold in the U.S. in 2015 were manufactured in North America, the highest rate of any international automaker. Last November, Honda began production of its 2017 CR-V in Ohio, the first-ever global production launch for the East Liberty Plant, above.

The pressure to maintain employment levels in Europe, meanwhile, comes largely from powerful labor unions that carry a “pervasive influence,” Hayes and Abernathy wrote. In stark contrast, unions in the U.S. have steadily seen their bargaining power eroded.

Moreover, countries such as Germany and Switzerland invest heavily in worker retraining, apprenticeships and vocational education. A report by the Council on Foreign Relations points out that the United States lags far behind other industrialized nations when it comes to spending on worker training, allocating only 0.1 percent of total GDP to training and assistance compared to 0.8 percent in Germany and 2.3 percent in Denmark.

Democratic proposals to spend more on retraining workers displaced by globalization have consistently met resistance from GOP lawmakers concerned such programs will become a government handout and waste of taxpayer money.

Another factor that limits the ability of American workers to upgrade their resumes is the cost of college, which is far more expensive in the United States than it is in Europe.

Possible Solutions

If jobs that once required human skills are inevitably being replaced by robots — or being shipped off to cheaper sources of labor — the question becomes what to do about the workers already laid off.

Warren Coats, an economist who worked at the International Monetary Fund for nearly three decades, said the answer first and foremost is training new workers for the jobs of the future and retraining laid-off workers for the jobs that are available now.

Former U.S. Trade Representative Hills agrees, arguing that American workers need retraining via public-private partnerships on a large scale.

“I don’t care why you lost your job, I want you to have a job,” Hills told The Diplomat.

“There are many acute needs and one of the biggest is infrastructure,” she said. “There are two types of infrastructure, human infrastructure and physical infrastructure, and we need to build them both.”

There are also a number of measures experts have suggested to help laid-off workers recover their financial losses. In the discussion paper “A Winning Trade Policy for the United States,” Alden and co-author Robert E. Litan call these measures “livelihood insurance.” They include options such as expanding the earned income tax credit for low-income workers, topping up salaries for workers who lose their positions and have to take new jobs at lower pay, repayable loans for workers training for new careers and subsidies to help workers move to where jobs in their field are more plentiful.

Alden is also an advocate of higher minimum wages, passed on a state-by-state basis, because minimum-wage jobs do not generally compete with positions in the trade sector but raising those wages would raise wages across industries.

Given that the manufacturing jobs that have been lost cannot be replaced, another option to ease the burden on workers is a guaranteed basic income, a concept that is gaining advocates on both ends of the U.S. political spectrum.

Coats prefers this option to other forms of livelihood insurance. While he has “qualms about overly complex schemes of assistance from government,” he told The Diplomat that he supports giving a minimum income to every citizen — man, woman and child, whether working or not — with requirements such as depositing certain percentages of that income into retirement and health insurance accounts.

a6.manufacturing.tweet.chart.storyFinally, the “gig economy” — in which workers take odd jobs such as freelance labor through sites such as TaskRabbit or drive for a car-sharing service like Uber — could provide another solution for laid-off workers.

But it is hard to definitively say if temporary gigs are a permanent solution, Alden cautioned.

“The economy places a lot more of the risk on the shoulders of working people, and the gig economy does some of that, which worries me,” he said.

But it is difficult to generalize, he added. Some Uber drivers need the job to feed their families; others just want to earn a little extra cash while working a full-time job.

This is only the “low-end” of the gig economy, Alden added. There is also a “high-end,” with jobs like consulting, which can earn large fees.

Adapting to Change

While unfettered trade has elevated some workers at the expense of others, most economists agree that on the whole, it has raised incomes, given consumers more choice and lifted billions out of poverty.

Ultimately, changes in trade, employment and, importantly, how we make products have been happening since the Industrial Revolution, said Coats. Automation has impacted how workers do their jobs since the advent of the printing press, the cotton gin and countless other inventions. It is the pace of the current change that is the problem, Coats said. Slow change allows populations to adapt. Rapid change can lead to isolationist tendencies and finger-pointing.

Trump is right, however, that a significant portion of the U.S. loss in manufacturing jobs is the result of global competition, specifically after China joined the World Trade Organization in 2001. That consequential move ushered in a wave of offshoring as Beijing aggressively courted businesses with sweetheart deals and took advantage of a ready pool of hundreds of millions of cheap workers unencumbered by labor rules, environmental standards or intellectual property protection.

But this is no longer relevant, Coats argued.

China did manipulate its currency and flood world markets with cheap goods in the early 2000s, but it is now doing the opposite, he told The Diplomat.

“That history is gone,” Coats said. “This history should not guide our policy today or for the future.” 

In fact, Jeffrey Rothfeder of the New Yorker reported last year that a significant number of companies are “reshoring” jobs from China and moving them back to the U.S., particularly the South. The reasons are varied — among them, the quality of the American workforce, lower energy costs in the U.S. and the advantages of minimizing far-flung supply lines. But another major factor is rising wages in China, which is beginning to face the same dilemma American manufacturers have grappled with for years: how to compete with nations that offer lower wages?

In an odd way, the forces of globalization and automation have leveled the playing field.

Rothfeder’s article quoted Jeffrey Immelt, CEO of General Electric, who said in 2013 that, “Today, the product is the process, more or less. If you look at an aircraft engine, the content of labor is probably less than 5 percent. We have two hours of labor in a refrigerator. So it really doesn’t matter if you make it in Mexico, the U.S. or China. Today it’s really about globalization, not about outsourcing; it’s how do I capture markets faster than the competition?”

Still, low wages abroad will continue to hurt blue-collar workers at home. To that end, some economists have praised Trump’s pledge to renegotiate NAFTA, agreeing that the 1994 trade pact needs to be updated. The president’s focus on bilateral trade deals over sweeping multilateral ones like the TPP may also be more manageable and better able to address specific worker concerns.

The president has a point, Coats argued, that bilateral trade deals offer more leverage to get better deals. And preferring bilateral agreements does not mean he is opposed to liberal trade full-stop.

“I fear the worst with Trump, but all the evidence isn’t in,” he said.

About the Author

Ryan Migeed (@RyanMigeed) is a freelance writer in Washington, D.C.

Anna Gawel (@diplomatnews) is the managing editor of The Washington Diplomat.