Trade vs. Productivity: What Caused U.S. Manufacturing’s Decline and How to Revive It

The prevailing narrative says automation was the main culprit behind U.S. manufacturing job losses in the early 2000s, and that automation is now powering an unprecedented manufacturing technology revolution that will continue to displace jobs. But the truth is trade pressure and faltering U.S. competitiveness were responsible for more than two-thirds of the 5.7 million manufacturing jobs lost between 2000 and 2010. And rather than entering a “fourth industrial revolution,” U.S. manufacturing productivity growth now is actually near an all-time low.

This report parses the data and concludes that U.S. policymakers should aim to close the country’s trade deficit in manufactured goods by fighting foreign mercantilism and pursuing a national competitiveness agenda that hinges in part on boosting manufacturing productivity rates. The report finds that successfully closing the manufacturing goods trade deficit this way would create 1.3 million jobs.

The conventional wisdom about the state of U.S. manufacturing rests on surprisingly shaky foundations. This report shines a light on two areas in particular where the best statistical evidence belies the false notion that automation and productivity growth were the biggest causes of the major manufacturing job losses seen in the early 2000s. First, while productivity growth in manufacturing compared to the rest of the economy was fairly consistent from 1990 to 2010 (25.8 percent in the 1990s, and 22.7 percent in the 2000s), job losses in the latter decade were 10 times greater than in the former.

Second, government statistics significantly overstate manufacturing productivity growth. Government data shows an astonishing 179 percent increase in computer manufacturing output from 2000 to 2010. But companies actually produced fewer computers during this time, not more. The discrepancy is explained by the fact that the massive growth in productivity represents increasing computer processing speeds. The resulting mismeasurement of this subsector significantly skews manufacturing statistics overall. Indeed, after removing computer and electronic products, it turns out that real value added from U.S. manufacturing grew just 6.4 percent from 2000 to 2015, not the reported 19.3 percent.

Instead of attributing manufacturing job losses primarily to automation and productivity, it is important to recognize how global competition contributed to upwards of two-thirds of the manufacturing jobs lost from 2000 to 2010. During this time, rapid growth in imports, particularly from China, reduced U.S. output in 12 of 19 manufacturing sectors. Simultaneously, China ramped up its mercantilist polices—from currency manipulation to forced intellectual property transfers and government subsidies—all of which hurt U.S. manufacturing employment.

Now, rather than entering a so-called “fourth industrial revolution,” U.S. manufacturing is in the doldrums. Indeed, while manufacturing productivity grew 24 percent from 2002 to 2006, it grew at a dismal rate of just 1.5 percent from 2012 to 2016. This is a major reason why the manufacturing trade deficit has ballooned 53 percent since 2010. Continuing to embrace the false narrative of vibrant manufacturing productivity growth distracts attention from the need to boost U.S. competitiveness and get tougher on foreign mercantilism. Unless U.S. manufacturers accelerate their productivity growth, it will be difficult for them to compete with manufacturers in other nations.