10 Truths About Trade

Hard facts about offshoring, imports, and jobs.

Brink Lindsey from the July 2004 issue

(Page 2 of 4)

Managerial and specialized professional jobs have grown rapidly, nearly doubling between 1983 and 2002, from 23.6 million to 42.5 million. These challenging, high-paying positions have jumped from 23.4 percent of total employment to 31.1 percent.

And these high-quality jobs will continue growing in the years to come. According to projections for 2002-12 prepared by the Bureau of Labor Statistics, management, business, financial, and professional positions will grow from 43.2 million to 52 million, increasing from 30 percent of total employment to 31.5 percent.

4. "Deindustrialization" Is a Myth

Opponents of open markets frequently claim that unshielded exposure to foreign competition is destroying the U.S. manufacturing base. That charge is flatly untrue. Figure 2 sets the record straight: Between 1980 and 2003, American manufacturing output climbed a dizzying 93 percent. Yes, production fell during the recent recession, but it is now recovering: the industrial production index for manufacturing rose 2.2 percent in 2003.

It is true that manufacturing's share of gross domestic product has been declining gradually over time -- from 27 percent in 1960 to 13.9 percent in 2002. The percentage of workers employed in manufacturing likewise has been falling, from 28.4 percent to 11.7 percent during the same period. But the primary cause of these trends is the superior productivity of American manufacturers. As shown in Figure 3, output per hour in the overall nonfarm business sector rose 50 percent between 1980 and 2002; by contrast, manufacturing output per hour shot up 103 percent. In other words, goods are getting cheaper and cheaper relative to services. Since this faster productivity growth has not been matched by a corresponding increase in demand for manufactured goods, the result is that Americans are spending relatively less on manufactures. Accordingly, manufacturing's shrinking share of the overall economy is actually a sign of American manufacturing prowess.

Exactly the same phenomenon has played out over a longer period in agriculture. In 1870, 47.6 percent of total employment was in farming. By 2002 the figure had fallen to 1.7 percent. In the future, manufacturing will in all likelihood continue down the trail blazed by agriculture. People who bemoan this prospect don't recognize economic progress when they see it.

International trade has had only a modest effect on manufacturing's declining share of the economy. It is true that imports displace some domestic production. On the other hand, exports boost sales for American manufacturers. The U.S. has been running a manufacturing trade deficit in recent years, but even if trade had been in balance between 1960 and 2002 the manufacturing share of GDP still would have fallen sharply, down to an estimated 16 percent (as opposed to the actual 13.9 percent). Innovation creates a steady, relentless drop in manufacturing's share of economic activity.

5. Imports Have Not Been a Major Cause of Recent Manufacturing Job Losses

Employment in the manufacturing sector has taken a beating in recent years. Between 1965 and 1990, the total number of manufacturing jobs fluctuated in a stable band between 16 million and 20 million; during the 1990s, the upper limit dropped to around 18 million; but between July 2000 and October 2003 jobs plummeted 16 percent, from 17.32 million to 14.56 million.

Although the losses have been severe, the charge that those jobs were eliminated by foreign competition simply doesn't square with the facts. As shown in Table 2, manufacturing imports rose only 0.6 percent between 2000 and 2003. By contrast, manufacturing exports fell by 9.6 percent. In other words, during this period the drop in exports accounted for 91 percent of the growth in the manufacturing trade deficit.

Accordingly, imports played at best a trivial role in the recent sharp decline in manufacturing employment. The main culprit was the worsening domestic market for manufactures during the recent recession -- in particular, a big drop in business investment. Between the fourth quarter of 2000 and the third quarter of 2002, total fixed nonresidential investment fell by 14 percent. Looking abroad, it was softening overseas markets, much more than stiffening import pressure, that added further downward pressure on domestic manufacturing jobs. Consequently, anti-trade activists who cite manufacturing job losses as a reason to turn away from trade liberalization couldn't be more wrong. Expanding overseas markets and commercial opportunities for American exporters would be a shot in the arm for manufacturing employment.

6. "Offshoring" Is Not a Threat to High-Tech Employment

In recent months, historical fears about vanishing manufacturing jobs have been compounded by growing anxiety about trade-related job losses in the service sector. Advances in information and communications technologies now make it possible for many jobs -- from customer service calls to software development -- to be performed anywhere.

In particular, the offshoring of information technology (I.T.) jobs to India and other low-wage countries has received a flurry of attention. According to a survey of hiring managers conducted by the Information Technology Association of America, 12 percent of I.T. companies already have outsourced some operations abroad. As for future trends, Forrester Research predicted in a widely cited study that 3.3 million white-collar jobs -- including 1.7 million back-office positions and 473,000 I.T. jobs -- will move overseas between 2000 and 2015.

Adding to the fear, I.T. employment has experienced a significant recent decline. In 2002, according to the Department of Commerce, the total number of I.T.-related jobs stood at 5.95 million, down from a 2000 peak of 6.47 million. Although some of those jobs were lost because of offshoring, the major culprits were the slowdown in demand for I.T. services after the Y2K buildup, followed by the dot-com collapse and the broader recession. Moreover, it should be remembered that the recent drop in employment took place after a dramatic buildup. In 1994, 1.19 million people were employed as mathematical and computer scientists. By 2000 that figure had jumped to 2.07 million -- a 74 percent increase. As of 2002, the figure had decreased only slightly to 2.03 million, still 71 percent higher than in 1994.