Much Ado About Very Little

Much Ado About Very Little April 14, 2008

here’s been a lot of talk in the Democratic primary campaign recently on the issue of trade. Both of the remaining Democratic Presidential candidates have denounced NAFTA, often in extreme terms, and both have been caught having subordinates telling foreign governments they don’t really mean it. But as Philippe Legrain pointed out in Sunday’s Washington Post, imports from Mexico in 2007 equaled only 1.7% of the total U.S. economy, while exports equaled 1.1% (and needless to say, at least some of those imports and exports would have occurred even absent NAFTA). It’s unlikely, therefore, that NAFTA has had a dramatic effect (positive or negative) on the U.S. economy.

Of course, the fact that NAFTA hasn’t had a major impact on the U.S. economy generally doesn’t mean it hasn’t had a significant impact on certain sectors of the economy, namely manufacturing. It’s true that, since NAFTA the number of manufacturing jobs in the U.S. has declined by about 2.7 million. Yet as Daniel Ikenson has noted, blaming NAFTA for this decline is a bit hasty:

Although U.S. manufacturing employment peaked in 1979 and has been trending downward since, there was an uptick in employment in the first few years after NAFTA took effect. Between 1993 and 1998, 500,000 net jobs were created in manufacturing. Did NAFTA create those jobs? I wouldn’t make that claim, but it certainly has more empirical support than the opposite claim—that NAFTA cost jobs….

During the pronounced manufacturing recession of 2000-2003, there was a precipitous drop of 2.8 million manufacturing jobs, but it’s hard to blame NAFTA for that. Manufactured imports from NAFTA countries were flat during that period: imports in 2000 were higher than the average for 2001 through 2003. Again, if you must blame NAFTA, look to the export side of the equation. U.S. exports dropped 11 percent from 2000 to 2003.

And for the record, since 2004, there has been a decline of 300,000 manufacturing jobs nationwide. That rate of 100,000 per year (vs. the rate of 193,000 per year during the entire post-peak period of 1979-2007) suggests that even the basis for the political rhetoric is about five years too stale.

As an aside, while it’s true that the number of U.S. manufacturing jobs has declined over the past few decades, it’s not true that U.S. manufacturing as a whole has declined. As the chart below indicates, the U.S.’s manufacturing output has actually gone up significantly over the last 40 years:

The fact that manufacturing output has been going up at the same time manufacturing employment has been going down is that manufacturing productivity has been going up even quicker. In fact, it is probably the case that to some extent manufacturing employment has been going down precisely because manufacturing productivity has been going up. But that’s a lesson for another day.

You might wonder why, if NAFTA’s overall effect on the U.S. is minor, it has engendered so much controversy. The answer, I think, lies in the fact that very often politics is more about symbolism than it is about the actual consequences of a given policy. Whatever it’s real effects, NAFTA has gotten tied up in people’s minds with all sorts of other issues, anxieties, and problems, and taking a stand against it (even if this doesn’t amount to much), is a good way for politicians to show that they care.

If this sounds implausible to you, consider that the trade deal with Colombia currently before congress is being vigorously opposed by both Democratic candidates, as well as by organized labor, despite the fact that only about 8% of imports from Colombia are currently subject to tariffs (and the new deal would leave them largely untouched).

(MHT: Cafe Hayek)

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  • jh

    I do find the current rethoric agains tthe Columbian Trade Deal depressing. Especially from Obama that just talked about the rubes clings to anti Trade Senitment. That needs to pass

  • Oh, I don’t know. Maybe the “American Manufacturing Uber Alles” sentiment is just another example of our pervasive nationalism…

    😛

  • SMB

    Statistics are great, but when I drive around Milwaukee these days I see a lot of rusting, empty factories, and a lot of people out of work. And things are better here than in my home town of Detroit. Maybe it is unfair to scapegoat a particular treaty (much less the poor Columbians), but we do need to have a discussion about the downside of moving factories around the map.

  • Blackadder

    The most recent data I could find on Milwaukee was from 2006, when the unemployment rate was 4.9%. For the state of Wisconsin as a whole, the unemployment rate for February 2008 was 4.9% (the unemployment rate for the state during 2006 varied between 4.7%). Back when NAFTA was enacted, the unemployment rate was 4.4%.

    For Detroit the situation is broadly similar (though you’re right that things are better in Milwaukee). The unemployment rate for Detroit was 7.2% in 2006, compared to 6.9% statewide. The unemployment rate in Michigan was 7.2% immediately before NAFTA went into effect, and is 7.2% now.

    Part of the problem with a “I drove around and look at all the abandoned buildings” method of judging the state of the economy is that we are more likely to notice certain things (e.g. the abandoned buildings) rather than others. It’s like the van at the corner. You’re more likely to notice it when it’s there than when it isn’t.

  • Unemployment measures unemployment. Over a 10 year period, one could reasonably anticipate that some who have lost their jobs in manufacturing have accepted service sector jobs, dropped out of the labor market, or moved. There are many layers to the trade onion. There are many other measures one can use. You can use lease cost for manufacturing space. You can use private sector union wages. You can use any number of proxies.

  • Blackadder

    Mr. Forrest,

    All true enough. The other side of the coin is that there are plenty of reasons why a person might get laid off or a factory might close or a city might decline besides foreign trade. As the chart I posted shows, U.S. manufacturing output is up significantly despite the decline in manufacturing employment.

  • SMB

    BA, your figures for Milwaukee are somewhat rosier than these, which place unemployment in 2007 at about 8%, second only to poor Detroit. See http://www.jsonline.com/story/index.aspx?id=675581

    I imagine your figures also include neighborhoods which are doing considerably better than the inner city (where all the rusting factories are). A study done in 2003 had joblessness for inner-urban males at a whopping 56%! http://www.uwm.edu/Dept/CED/publications/stealth_depression803.html

    So maybe my impressions from driving around the ‘hood’ are not so misleading after all. This is not to say that NAFTA is the only culprit–these jobs have been disappearing for a while. But it shows that with statistics as with drive-by’s, it all depends on what you are looking for.

  • How many of our cars come from Mexico?
    Japan took those jobs without an FTA.