One needs to look no further than the campaign trail to understand why America is witnessing a popular backlash against international trade. Instead of showing leadership and articulating constructive alternatives to trade bashing, Sens. Barack Obama and Hillary Clinton are fanning the flames ahead of Tuesday's primary elections.
The candidates' anti-trade narratives rely on discredited assertions concocted to mislead and confuse. First is the claim that import competition explains the decline of the U.S. manufacturing sector, including the loss of jobs. Second is that trade deals like the North American Free Trade Agreement have caused the U.S. trade deficit to swell, which means we are losing at trade.
But U.S. manufacturing is not in decline. Quite the opposite is true. Output, revenues and profits in the sector all achieved records in 2006, and preliminary government data indicates that new records were set in 2007. American factories remain the world's most prolific, producing 2.5 times the value of Chinese output.
Manufacturing employment has been declining, but that's nothing new; it peaked 29 years ago, in 1979. Productivity gains and the shift in manufacturing emphasis to higher value-added, technology-intensive products have reduced demand for traditional manufacturing labor.
Between 2000 and 2003 there was a pronounced manufacturing recession, during which 2.8 million jobs in the sector were eliminated. The two candidates extrapolate from that statistic to assert that 3 million manufacturing jobs have been lost since 2000 on account of bad trade deals, like NAFTA, as though the trend were continuing. That's wrong.
Between 1979 and 2007 the number of U.S. manufacturing jobs declined from 19.4 million to 14.0 million or by 192,857 per year. During the recession period of 2000-2003, the rate of job decline accelerated to 933,333 per year. But from 2004 to 2007, the decline was only 100,000 per year. In other words, the period of steep employment declines ended five years ago (before the last presidential election campaign). For the past four years the rate of attrition in manufacturing employment has been well below the 28-year average.
If trade had something to do with the loss of those 2.8 million jobs between 2000 and 2003, imports weren't the culprit. Manufactured imports did not increase at all during those three years. U.S. exports, however, dropped off by 11 percent during that precise period. If trade had anything to do with the loss of 2.8 million jobs, it is more plausible that slowing exports, and not rising imports, explain some of the decline.
NAFTA went into effect six years before 2000 and has been in effect for four years since 2003. If NAFTA is to blame for job losses between 2000 and 2003, then it should get credit for manufacturing's record performances during the 1990s and the sector's even better performance since 2003.
If anything, trade agreements have had a moderating effect on the trade deficit. Between 2000 and 2007, the overall U.S. deficit in manufactured goods doubled from about $300 billion to about $600 billion. But with NAFTA countries, the deficit has been relatively and consistently small, at about $40 billion each year. With all free trade agreement partner countries, the deficit has been lower still, at around $25 billion per year since 2000. And with Central American Free Trade Agreement-partner countries, manufacturing trade went from a deficit averaging $1 billion every year between 2000 and 2005 to a surplus of about $1 billion per year during the two years since CAFTA was implemented.
Fixation on the trade balance is misguided anyway. The important questions are whether the economy is growing and creating good jobs, and whether adequate investment is being made to enable future growth. Since 1993 (the year before NAFTA) the size of the U.S. economy has grown by 54 percent in real terms; 27 million net new jobs have been created, worker productivity has increased by 39 percent and real compensation has increased by 23 percent. This economic expansion occurred as U.S. imports increased from $589 billion in 1993 to $1.9 trillion in 2007.
Imports are crucial, not only to consumers but also to U.S. producers who rely on foreign-made components, raw materials and capital equipment. In recent years, U.S. producers have accounted for the majority of imports. And as U.S. demand has slowed, the importance of reliable, growing markets abroad has never been more evident. U.S. exports were stronger than ever in 2007.
Trade -- both imports and exports -- has been vital to the success of U.S. manufacturing and the economy overall. Whoever it may be, America's next president already knows that. The trouble is that two of the candidates continue to pretend otherwise.