Commentary

Trade Fears Are All Smoke

Behind the political haze is a far rosier picture you’ve likely heard little about

On the campaign trail and on Capitol Hill, politicians are promising to save U.S. manufacturing from the sweeping tides of international trade.

“If we don’t have a strong manufacturing base in our economy, it won’t be long until we don’t have a strong economy,” proclaims presidential candidate and Sen. Hillary Rodham Clinton (D-N.Y.). Congressional Democrats have been pitching a new trade policy agenda that will “stand up for American workers, farmers and businesses, especially in the hard-hit U.S. manufacturing sector [emphasis added].”

When Congress reconvenes, committee leaders are expected to begin marking up some of the nearly two dozen pieces of pending trade-related legislation. Most of those bills are antagonistic toward our trade partners or outright protectionist, inspired in large measure by the myth of American manufacturing decline.

But U.S. manufacturing is not in decline; it is thriving. By historic standards and relative to other countries’ manufacturing sectors, U.S. manufacturing is firing on all cylinders. In 2006, the sector achieved record output, record sales, record profits, record profit rates and record return on investment. American manufacturing performance has never been stronger.

Nor was 2006 an aberration. Since the nadir of the manufacturing recession in 2002, all of those indicators have been trending upward. Earlier this month, the Federal Reserve released its monthly report on industrial production, which found that U.S. manufacturing output has continued to rise throughout 2007.

Contrary to the inferences one would be expected to draw from the dishonest political discourse, U.S. factories remain the world’s most prolific, accounting for more than 20 percent of the world’s added manufacturing value. By comparison, Chinese plants account for about 8 percent. Thus, for every dollar of product made in China, U.S. factories produce $2.50 of output.

And not only is manufacturing thriving. It is thriving in large measure because of international trade. Manufacturing exports and imports hit records in 2006.

Over the past few years, the world economy has been growing at a faster clip than the U.S. economy. Domestic producers have availed themselves of the benefits of that growth through higher foreign sales revenues and declining unit costs of production — the result of the longer production runs afforded by growing foreign demand.

Meanwhile, better access to imported raw materials, components, other production inputs, and capital raised though stock and bond issues has helped restrain overall costs of production, as growing world demand has bid up the prices of industrial commodities.

While misguided (or disingenuous) politicians rail against the rising trade deficit, they fail to comprehend (or acknowledge) that U.S. producers are America’s largest importers. In 2006, 55 percent of all U.S. goods imports were industrial products and components, the kinds of purchases made not by consumers, but by producers.

That statistic supports the strong correlation between manufactured imports and U.S. manufacturing output, which has been observed for decades. Imports and output rise and fall in tandem. Thus, policymakers who seek to restrain imports are effectively advocating a manufacturing recession. If their mercantilist worldview prevails, and imports decline, reports of idled factory equipment will not be far behind.

Those who speak of American deindustrialization often cite the decline in manufacturing employment. Recently, Sen. Carl Levin (D-Mich.) complained that “the Bush administration has not lifted a finger to support manufacturing in America while we have lost 3 million manufacturing jobs on its watch.”

While it is true that the number of workers employed in the U.S. manufacturing sector declined by about 2.8 million between 2000 and 2003, the fact is that job attrition in the sector reverted to its much more modest, decades-long rate of decline after 2003. Since 2003, the sector has shed about 300,000 jobs.

But declining employment in a sector that is producing record output is hardly credible evidence of doom. In fact, the two indicators taken together are evidence of soaring labor productivity, which is the source of long-term increases in living standards. With the national unemployment rate at 4.5 percent, 1.8 million net new jobs created on average every year since 1980, U.S. plants producing record output, and manufacturing companies earning record profits, what is so troubling about the loss of manufacturing jobs?

The much larger threat to manufacturing is the proclivity of meddling policymakers to fix what ain’t broke. Spreading myths about the precariousness of U.S. manufacturing and laying the blame on trade policy may score political points with the unions. But if Congress passes legislation that compromises the access of U.S. producers to international markets, there will be real problems to solve.

Daniel Ikenson is associate director of the Center for Trade Policy Studies at the Cato Institute.