The Commerce Department's recent announcement of a record tradedeficit in 2004 adds fuel to the debate over the impact of risingimports on the U.S. economy and, in particular, U.S. manufacturing.When America's manufacturing sector slipped into recession in thesummer of 2000, critics of U.S. trade policy were quick to blamemanufacturing imports for declining production and loss of jobs.During the next three years, as the manufacturing sector shed a net3 million jobs and output continued to sputter, a rising tide ofimports was almost universally believed to be the drivingfactor.
The assumed connection between rising imports and fallingproduction sounds plausible. If Americans buy more shirts, shoes,and TV sets from producers abroad, it would seem obvious thatAmerican companies would then produce fewer shirts, shoes, and TVsto meet domestic demand. Mass layoffs and closed factory gateswould soon follow, or so we are told by certain politicians andcable TV commentators.
That protectionist claim can be tested by comparing the volumeof manufacturing imports to manufacturing output from year to year.If the critics of trade are correct in their assumptions, a rise inthe growth of manufacturing imports should lead quite directly to adecline in the growth of manufacturing output. By the samereasoning, a decline in imports should stimulate domestic output,as consumers substitute domestic-made goods for foreign-made goods.But an analysis of manufacturing imports and output since 1989plainly refutes this pillar of protectionist thinking.
Figure 1 shows the change from the previous year in real(inflation-adjusted) manufacturing imports and manufacturing outputin the United States for each year since 1989. Manufacturingimports are defined as industrial supplies and materials, capitalgoods, automotive vehicles and parts, and consumer goods. Manufacturingoutput is measured by the annual average of the Federal ReserveBoard's monthly index of manufacturing output. The percentage change inreal manufacturing imports from the previous year is plotted on thehorizontal axis, and the percentage change in manufacturing outputfrom the previous year is plotted on the vertical axis.
If the critics of trade were correct, the trend-line would besloping down--that is, the more rapidly imports grow in aparticular year, the more depressed we would expect manufacturinggrowth to be in that same year. A dreaded "flood of imports" shouldmean slower growth or outright contraction of manufacturing output,while a slowdown of import growth should bring relief to domesticproducers and thus spur faster domestic output. In reality, theopposite proves to be true.
Since 1989, accelerated growth in real manufacturing imports hasbeen strongly tied to accelerated growth in domestic manufacturingoutput. Indeed, the correlation is almost uncanny, with no yearstraying far from the trend-line. Years of rapid growth inmanufacturing imports are also years of rapid growth inmanufacturing output, and years of slower growth in imports areyears of sluggish growth, or even declines, in domestic output.
Specifically, the years 1989-91 and 2001-2003 were periods oflow growth in both imports and output. In contrast, the years1992-2000 saw robust manufacturing output growth coupled withrobust manufacturing import growth. Consider two recent years atopposite ends of the line: In 2001, manufacturing output fell inthe United States by 4.0 percent, but the fall in manufacturingimports was an equally sharp 4.7 percent. In 2004, manufacturingoutput rebounded with strong growth of 4.8 percent, accompanied bystrong import growth of 12.5 percent.
One explanation for the positive link between imports and outputis that American producers themselves are major importers. In fact,about half of the goods imported into the United States each yearare not for consumers directly, but for U.S. businesses. Americanfirms import capital machinery, industrial supplies and materials,and petroleum and other raw materials that allow them to producefinal products for sale to consumers. As American-based companiesramp up production to meet rising consumer demand, they must importmore capital goods, intermediate inputs, and raw materials to keepthe assembly lines humming.
Another reason why imports and output rise together is that, ina flexible, market-driven domestic economy, resources can quicklyshift from one sector to another. When imports displace domesticproduction in one sector, it frees resources to expand productionin other sectors of the economy where Americans can produce goodsand services more efficiently. Thus, imports do not lead to lessoutput and fewer jobs, but to a shift in resources, production, andemployment to sectors where Americans are more productive.
Indeed, for U.S. manufacturers, imports and output are a packagedeal. Rising domestic demand and output spur imports, while importspromote gains in productivity and output.
The net loss of jobs in manufacturing cannot be blamed on risingimports, because imports cannot be blamed for falling manufacturingoutput. In fact, the largely positive story of U.S. manufacturingduring the past decade has been one of rising output produced byfewer workers. In other words, the output per manufacturing workerhas been rising so rapidly that it has outstripped the rise inproduction, allowing U.S. factories to produce more output withfewer workers.
Although manufacturing imports do not depress total output, theydo accelerate the shift of output into sectors where Americanworkers are even more productive. Between 1989 and 2004, the volumeof manufacturing output in the United States grew an impressive 51percent, but behind that overall growth was a significant shift inwhat Americans manufacture.
Since 1989, the volume of output has grown dramatically in suchhigh-tech sectors as semiconductors, printed circuit boards, andother electronic components; computers; and video, audio, and othercommunications and information-processing equipment. Output hasalso grown more rapidly than average in recreational vehicles,campers, automobiles, light trucks, and automotive parts; medicalequipment; pharmaceuticals and medicine; and chemical products.
During that same period, other sectors of U.S. manufacturinghave seen dramatic declines in output. Most prominent among theshrinking industries are apparel and leather goods, textile, fabricand yarn mill products, newspaper publishing and paper mills,logging, primary smelting, nonferrous metals, pig iron, and coke.Also contracting during that period, especially in the late 1980sand early 1990s, were the aerospace, aircraft and parts, anddefense and space equipment sectors--not primarily because ofrising import competition, but because of the end of the ColdWar.
Import competition has undoubtedly accelerated the decline of anumber of those shrinking, sunset industries. The most vulnerableto import competition are labor-intensive industries where thelower wages paid in developing countries allow their producers tocompete most effectively. But growing trade also allows Americansto shift production into more capital-intensive sectors where moreskilled and educated Americans enjoy a comparative advantage. As aresult, trade is not about more or fewer jobs and output, but aboutbetter jobs and more output in those sectors where we enjoy themost advantages as a nation.
The evidence makes clear that protectionists are selling avision that does not reflect reality. They believe that if importsare reduced, through tariffs or currency adjustments or otherpolicy tools, Americans will buy more domestically produced goodsinstead, and create more and better paying jobs at home. But thereality of the American economy is closer to the opposite. Theprotectionist dream is really a nightmare for U.S. manufacturers.Slower growth of imports typically means slower growth in domesticoutput.
The evidence from the past 15 years indicates that raising tradebarriers to supposedly protect U.S. manufacturing would be amistake. Raising barriers would not stimulate overall production.It could save jobs in certain industries, at least temporarily, butit would do so at the expense of output in other, generally morecompetitive industries. Protectionism would only slow the ongoing,beneficial transition within U.S. manufacturing to those sectorswhere Americans are better able to compete in worldmarkets.
 U.S.Commerce Department, "National Income and Product Accounts," Bureauof Economic Analysis, Table 4.2.6., Real Exports and Imports ofGoods and Services by Type of Product, www.bea.doc.gov/bea/dn/nipaweb/index.asp.
 U.S. Federal Reserve Board,"Industrial Production and Capacity Utilization: Historical Data,"Industrial Production, Seasonally Adjusted, Tables 1 and 2,www.federalreserve.gov/releases/g17/ipdisk/ip.sa.In statistical terms, the correlation is 0.94, with 1.00 being aperfect correlation.See U.S. Federal Reserve Board, "Industrial Production and CapacityUtilization: Historical Data."