Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade, Cato Trade Policy Analysis No. 35

L I C Y A N A L Y S I S T R A D E P O L I C Y A N A L Y S I S T R A D E P O L I C Y A N A L Y S I S T R A D E P O

Reports of the death of U.S.manufac-turing have been greatly exaggerated.Since the depth of the manufacturingrecession in 2002,the sector as a whole hasexperienced robust and sustained output,revenue,and profit growth.The year 2006 was a record year for output,revenues,profits,profit rates,and return on invest-ment in the manufacturing sector.Anddespite all the stories about the erosion of U.S.manufacturing primacy,the UnitedStates remains the world’s most prolificmanufacturer—producing two and a half times more output than those vauntedChinese factories in 2006. Yet,the rhetoric on Capitol Hill and onthe presidential campaign trail about adeclining manufacturing sector is reaching afevered pitch.Policymakers point repeated-ly to the loss of 3 million manufacturing jobs as evidence of impending doom,eventhough those acute losses occurred between2000 and 2003,and job decline in manu-facturing has leveled off to historic averages.In the first six months of the 110thCongress,more than a dozen antagonisticor protectionist trade-related bills havebeen introduced,which rely on the pre-sumed precariousness of U.S.manufactur-ing as justification for the legislation. Justification for those bills is predicated onthe belief that manufacturing is in declineand that the failure of U.S.trade policy toaddress unfair competition is to blame.Butthose premises are wrong.The totality of evidence points to a robust manufacturingsector that has thrived on account of greater international trade.

Thriving in a Global Economy

The Truth about U.S.Manufacturing and Trade

by Daniel Ikenson

August 28,2007No.35

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

Antidumping Exposed:The Devilish Details of Unfair Trade Law

(Cato Institute,2003).

Executive Summary

Introduction

A certain fallacy has taken hold in Wash-ington.Too many lawmakers are operatingunder a mistaken trio of assumptions:that U.S.manufacturing is on the decline,that unfair for-eign competition explains that decline,and thatfailure to formulate a policy response to arrestand reverse that trend imperils the nation’sfuture.The ascent of those views on Capitol Hillis a testament to the power of exaggeration,rep-etition,and indignation,and is a profound dis-service to the truth.Some very bad policy options,predicated on those myths,are now under consideration in Congress.Reports of the death of U.S.manufacturinghave been greatly exaggerated.It is true thatthe number of workers employed in U.S.man-ufacturing industries declined by about threemillion between 2000 and 2003.It is also truethat real wage growth in manufacturing hasbeen anemic since the manufacturing recessionearlier in the decade.And it is correct that themanufacturing sector’s contribution to GDPhas been shrinking.But those data are not evi-dence of a declining manufacturing sector orunfair trade competition.At most,they shedsome light on a sector that is in transition.Andduring that transition,some phenomenal oper-ating results have been registered.Since the nadir of the manufacturing reces-sion in 2002,the sector as a whole has experi-enced robust and sustained output,revenue,and profit growth,achieving gains in all threefor four straight years.Two thousand and six was a record year for output,revenues,profits,profit rates,and return on investment in themanufacturing sector.And,despite all the sto-ries about the erosion of U.S.manufacturingprimacy,the United States remains the world’smost prolific manufacturer—producing twoand a half times more output in 2006 thanthose much-celebrated Chinese factories.Of course,manufacturing is not monolithic.It comprises a variety of industries,each facingdifferent economic circumstances.Some indus-tries may be doing very well,while others strug-gle to adapt to changing circumstances.Accord-ing to the findings presented in this paper,forevery two U.S.manufacturing industries thatexperienced increases in revenue,one experi-enced a decline;for every two that saw their prof-its increase,one saw its profits decline;for every two that experienced increases in output,oneexperienced falling output.Thus,roughly two-thirds of U.S.manufacturing is doing well by themost traditional metrics of economic health. What about the other third? Can their lagginghealth be attributed to increased foreign compe-tition? If so,are policymakers justified in inter- vening to try to change the tide? This paper seeks to present the facts aboutthe condition of U.S.manufacturing,while dis-pensing with some persistent myths along the way.

Proliferating Myths

Washington is abuzz with talk of U.S.man-ufacturing demise.Protectionists on the op-edpages,on the airwaves,and in Congressemphasize the decline of U.S.manufacturing atthe hands of insidious foreign competition, which has been enabled (if not encouraged) by an administration that has ignored the plightof blue-collar America,while tolerating unfairforeign trade practices.Reinforcing that per-spective are the opinions expressed almostnightly by television talk show hosts,who seemmore intent on stoking controversy than onproviding a forum for honest debate. The thrust of those messages,which con-tinue even after several consecutive years of recovery and strong operating performance within the manufacturing sector,is that new trade policies are needed to arrest the decline of U.S.manufacturing,which would otherwise bein excellent financial health,and a reliableengine of U.S.job growth.Averting new,play-ing-field-leveling trade policies in the nearterm,so the message goes,will further erodeU.S.capacity to maintain its position of globaleconomic preeminence.Several years into this campaign,and longafter the facts on the ground have changed sig-nificantly,that message is gaining traction with

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Reports of thedeath of U.S.manufacturing have been greatly exaggerated.

policymakers.One reason for the traction isthat political action tends to lag behind eco-nomic or social circumstances.In 2007 we arefive years beyond the nadir of the U.S.manu-facturing recession,well into recovery and evenrecord territory.Yet,Congress appears keen toact on behalf of the sector,as if its troubles weren’t several years removed.Another reasonhas to do with the change in control of Congress last November.An agenda that catersto the wishes of labor—and its manufacturingindustry benefactors—is more likely to res-onate with the new Democratic majority. The political story of manufacturing is allabout job losses.Between 2000 and 2003,thenumber of workers employed in the U.S.manu-facturing sector declined from around 17.3 mil-lion to around 14.5 million—a drop of 2.8 mil-lion workers.

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But since then the rate of declinehas reverted to the much more modest,decades-long manufacturing average.Between 2003 and2006,the number of workers employed in thesector dropped to 14.2 million—a decline of only 300,000 workers.

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And on top of that pic-ture of stabilizing manufacturing employment,nearly all relevant statistics point to a thrivingmanufacturing sector. Yet the three million jobs lost figure hasbecome emblematic of some presumed failureof policy.That number has been cited andrepeated so frequently that it is treated with acertain solemnity,a false significance,which farexceeds its utility as a measure of the conditionof U.S.manufacturing then or now.The factthat the U.S.manufacturing sector has recov-ered fully from its recession in 2001–02,andhas even reached new heights with respect toseveral important indicia,has been nearly totally lost in the political debate about whatmust be done to save manufacturing.In March the congressional leadershipunveiled its “New Trade Policy for America,” which contains several policy bullet points,including the following:“Democrats offer atrade policy that will [among other things]stand up for American workers,farmers,andbusinesses,

especially in the hard-hit U.S.manufacturing sector

.”

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Democrats advocate betterenforcement of trade agreements to “ensurethat countries play by the rules so that trade isa two-way street.”

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For the record,last year the “hard-hit”man-ufacturing sector produced more output than atany other time in history,while achieving recordsales and record profits (in constant dollarterms).Likewise,U.S.manufacturing exportsreached record highs.Thus,trade is already atwo-way street,and policymakers should resistany measures that might impede its flow.Lawmakers are so keen to be seen doingsomething for manufacturing that many appear unwilling to acknowledge the sector’stremendous recovery.Such acknowledgementcould deprive them of an opportunity to reportback to their constituents how hard they are working for the American family. Testifying recently at a House Ways andMeans Committee trade subcommittee hearingon the merits of the Nonmarket Economy TradeRemedy Act of 2007 (a bill to,among otherthings,authorize the application of countervail-ing duties against nonmarket economies),Rep.Peter Visclosky (D-IN) offered,“My message,simply put,is that if we are to maintain a manu-facturing base in the United States,we

must

havezero tolerance for unfair and illegal trade....If our companies cannot count on a level playingfield,then U.S.manufacturing has no long-termfuture.”

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Visclosky should also consider thegrowing importance of export markets to U.S.manufacturers lest he think there is nothing tolose by enacting aggressive trade legislation.In May,Democratic members of the Michi-gan congressional delegation as well as the state’sgovernor issued their “American ManufacturingInitiative,”billed as a “comprehensive initiativeto revitalize U.S.manufacturing.”

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In offeringhis support of the initiative,Sen.Carl Levin (D-MI) opined that “the Bush Administration hasnot lifted a finger to support manufacturing inAmerica while we have lost three million man-ufacturing jobs on its watch.”

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Rep.JohnDingell (D-MI),another sponsor of the initia-tive,declared:“Manufacturers are hurting inlarge part due to this Administration’s lax atti-tude toward unfair trade practices.”

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In fairness,Michigan’s political representa-tives may have reason to despair about their

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Last year the “hard-hit”manufacturing sector producedmore output thanat any other time inhistory,whileachieving recordsales and recordprofits.