10 Truths About Trade

[RS Davis]

Hard facts about offshoring, imports, and jobs.

Brink Lindsey

Is globalization sending the best American jobs overseas? If you get your news from CNN’s Lou Dobbs, the answer is "of course" and the only real issue is how many trade restrictions should be applied to stem the bleeding.

But the recent scare about "offshoring" is just the latest twist on an inaccurate, decades-old complaint that global trade is stealing jobs and causing a "race to the bottom" in which corporations relentlessly scour the world for the lowest wages and most squalid working conditions. China and India have replaced 1980s Japan and 1990s Mexico as the most feared foreign threats to U.S. employment, and the old fallacy of job scarcity has once again reared its distracting head.

The truth is cheerier. Trade is only one element in a much bigger picture of incessant turnover in the American labor market. Furthermore, the overall trend is toward more and better jobs for American workers. While job losses are real and sometimes very painful, it is important -- indeed, for the formulation of sound public policy, it is vital -- to distinguish between the painful aspects of progress and outright decline.

Toward that end, and to counter protectionist "analysis" masquerading as fact, here are 10 core truths about global trade and American jobs.

1. The Number of Jobs Grows With the Population

As Figure 1 shows vividly, the total number of jobs in the American economy is first and foremost a function of the size of the labor force. As the population grows, the number of people in the work force grows; then market forces absorb that supply and deploy labor to different sectors of the economy.

Consider all the major events that have increased the supply of labor during the last half-century: the baby boom, the surge in work force participation by women, and rising rates of immigration after decades of restrictionist policies. Consider as well the key developments that have slashed demand for certain kinds of labor: the growing competitiveness of foreign producers and falling U.S. barriers to imports; the shift by American companies toward globally integrated production and the consequent relocation of many operations overseas; the deregulation of the transportation, energy, and telecommunications industries and the wrenching restructuring that followed; and, most important, the many waves of labor-saving technological innovations, from the containerization that replaced longshoremen to the dial phones that replaced switchboard operators to the factory-floor robots that replaced assembly-line workers to the automatic teller machines that replaced bank tellers.

Yet in the face of all this flux, no chronic shortage of jobs has ever materialized. Over those tumultuous five decades, a growing economy and functioning labor markets were all that was needed to accommodate huge shifts in labor supply and demand. Now and in the future, sound macroeconomic policies and continued flexibility in labor markets will suffice to generate increasing employment, notwithstanding the rise of China and India and the march of digitization.

2. Jobs Churn Constantly

The steady increase in total employment masks the frenetic dynamism of the U.S. labor market. Gross changes -- total new positions added, total existing positions eliminated -- are much greater in magnitude. Large numbers of jobs are being shed constantly, even in good times. Total employment continues to increase only because even larger numbers of jobs are being created.

According to economist Brad DeLong, a weekly figure of 360,000 new unemployment insurance claims is actually consistent with a stable unemployment rate. In other words, when the unemployment rate holds steady -- that is, total employment grows fast enough to absorb the ongoing increase in the labor force -- some 18.7 million people will lose their jobs and file unemployment insurance claims during the course of a single year. Meanwhile, even more people will get new jobs.

More detailed and dramatic evidence of job turnover can be found in Table 1. According to data compiled by the Department of Labor’s Bureau of Labor Statistics, total private-sector employment rose by 17.8 million between 1993 and 2002. To produce that healthy net increase, a breathtaking total of 327.7 million jobs were added, while 309.9 million jobs were lost. In other words, for every one net new private-sector job created during that period, 18.4 gross job additions had to offset 17.4 gross job losses.

In light of those facts, it is impossible to give credence to claims that job losses in this or that sector constitute a looming catastrophe for the enormous and dynamic U.S. economy as a whole. It is as inevitable that some companies and industries will shrink as it is that others will expand. Localized challenges and problems should not be confused with national crises.

3. Challenging, High-Paying Jobs Are Becoming More Plentiful, Not Less

The ongoing growth in total employment is frequently dismissed on the ground that most of the new positions being created are low-paying, dead-end "McJobs." The facts show otherwise.

Managerial and specialized professional jobs have grown rapidly, nearly doubling between 1983 and 2002, from 23.6 million to 42.5 million. These challenging, high-paying positions have jumped from 23.4 percent of total employment to 31.1 percent.

And these high-quality jobs will continue growing in the years to come. According to projections for 2002-12 prepared by the Bureau of Labor Statistics, management, business, financial, and professional positions will grow from 43.2 million to 52 million, increasing from 30 percent of total employment to 31.5 percent.

4. "Deindustrialization" Is a Myth

Opponents of open markets frequently claim that unshielded exposure to foreign competition is destroying the U.S. manufacturing base. That charge is flatly untrue. Figure 2 sets the record straight: Between 1980 and 2003, American manufacturing output climbed a dizzying 93 percent. Yes, production fell during the recent recession, but it is now recovering: the industrial production index for manufacturing rose 2.2 percent in 2003.

It is true that manufacturing’s share of gross domestic product has been declining gradually over time -- from 27 percent in 1960 to 13.9 percent in 2002. The percentage of workers employed in manufacturing likewise has been falling, from 28.4 percent to 11.7 percent during the same period. But the primary cause of these trends is the superior productivity of American manufacturers. As shown in Figure 3, output per hour in the overall nonfarm business sector rose 50 percent between 1980 and 2002; by contrast, manufacturing output per hour shot up 103 percent. In other words, goods are getting cheaper and cheaper relative to services. Since this faster productivity growth has not been matched by a corresponding increase in demand for manufactured goods, the result is that Americans are spending relatively less on manufactures. Accordingly, manufacturing’s shrinking share of the overall economy is actually a sign of American manufacturing prowess.

Exactly the same phenomenon has played out over a longer period in agriculture. In 1870, 47.6 percent of total employment was in farming. By 2002 the figure had fallen to 1.7 percent. In the future, manufacturing will in all likelihood continue down the trail blazed by agriculture. People who bemoan this prospect don’t recognize economic progress when they see it.

International trade has had only a modest effect on manufacturing’s declining share of the economy. It is true that imports displace some domestic production. On the other hand, exports boost sales for American manufacturers. The U.S. has been running a manufacturing trade deficit in recent years, but even if trade had been in balance between 1960 and 2002 the manufacturing share of GDP still would have fallen sharply, down to an estimated 16 percent (as opposed to the actual 13.9 percent). Innovation creates a steady, relentless drop in manufacturing’s share of economic activity.

5. Imports Have Not Been a Major Cause of Recent Manufacturing Job Losses

Employment in the manufacturing sector has taken a beating in recent years. Between 1965 and 1990, the total number of manufacturing jobs fluctuated in a stable band between 16 million and 20 million; during the 1990s, the upper limit dropped to around 18 million; but between July 2000 and October 2003 jobs plummeted 16 percent, from 17.32 million to 14.56 million.

Although the losses have been severe, the charge that those jobs were eliminated by foreign competition simply doesn’t square with the facts. As shown in Table 2, manufacturing imports rose only 0.6 percent between 2000 and 2003. By contrast, manufacturing exports fell by 9.6 percent. In other words, during this period the drop in exports accounted for 91 percent of the growth in the manufacturing trade deficit.

Accordingly, imports played at best a trivial role in the recent sharp decline in manufacturing employment. The main culprit was the worsening domestic market for manufactures during the recent recession -- in particular, a big drop in business investment. Between the fourth quarter of 2000 and the third quarter of 2002, total fixed nonresidential investment fell by 14 percent. Looking abroad, it was softening overseas markets, much more than stiffening import pressure, that added further downward pressure on domestic manufacturing jobs. Consequently, anti-trade activists who cite manufacturing job losses as a reason to turn away from trade liberalization couldn’t be more wrong. Expanding overseas markets and commercial opportunities for American exporters would be a shot in the arm for manufacturing employment.

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[RS Davis]

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6. "Offshoring" Is Not a Threat to High-Tech Employment

In recent months, historical fears about vanishing manufacturing jobs have been compounded by growing anxiety about trade-related job losses in the service sector. Advances in information and communications technologies now make it possible for many jobs -- from customer service calls to software development -- to be performed anywhere.

In particular, the offshoring of information technology (I.T.) jobs to India and other low-wage countries has received a flurry of attention. According to a survey of hiring managers conducted by the Information Technology Association of America, 12 percent of I.T. companies already have outsourced some operations abroad. As for future trends, Forrester Research predicted in a widely cited study that 3.3 million white-collar jobs -- including 1.7 million back-office positions and 473,000 I.T. jobs -- will move overseas between 2000 and 2015.

Adding to the fear, I.T. employment has experienced a significant recent decline. In 2002, according to the Department of Commerce, the total number of I.T.-related jobs stood at 5.95 million, down from a 2000 peak of 6.47 million. Although some of those jobs were lost because of offshoring, the major culprits were the slowdown in demand for I.T. services after the Y2K buildup, followed by the dot-com collapse and the broader recession. Moreover, it should be remembered that the recent drop in employment took place after a dramatic buildup. In 1994, 1.19 million people were employed as mathematical and computer scientists. By 2000 that figure had jumped to 2.07 million -- a 74 percent increase. As of 2002, the figure had decreased only slightly to 2.03 million, still 71 percent higher than in 1994.

Despite the trend toward offshoring, I.T.-related employment is expected to see healthy increases in the years to come. According to Department of Labor projections, the total number of jobs in computer and mathematical occupations will jump from 3.02 million in 2002 to 4.07 million in 2012 -- a 35 percent increase. Of the 30 specific occupations projected to grow fastest during those 10 years, seven are computer-related. (See Figure 4 for the fastest-growing computer-related occupations.) Thus, the recent downturn in I.T. is likely only a temporary break in a larger trend of robust job growth.

The wild claims that offshoring will gut employment in the I.T. sector are totally at odds with reality. I.T. job losses projected by Forrester amount to fewer than 32,000 per year -- relatively modest attrition in the context of 6 million I.T. jobs. These losses, meanwhile, will be offset by newly created jobs as computer and mathematical occupations continue to boom. The doomsayers are confusing a cyclical downturn with a permanent trend.

7. Globalization of Services Creates Enormous Opportunity for American Industry



Offshoring of I.T. services to India and elsewhere has been made possible by ongoing advances in computer and communications technologies. If those advances indeed pose a threat to domestic I.T. services industries, then it should be possible to trace the emergence of that threat in trade statistics, since offshoring registers as an increase in services imports.

Yet the fact is that the U.S. runs a trade surplus precisely in the I.T. services most directly affected by offshoring. In the categories of "computer and data processing services" and "database and other information services," American exports rose from $2.4 billion in 1995 to $5.4 billion in 2002, while imports increased from $0.3 billion to $1.2 billion. Thus, the U.S. trade surplus in these services has expanded from $2.1 billion to $4.2 billion.

Meanwhile, the same technological advances that have given rise to offshoring are facilitating the international provision of all kinds of services -- banking, accounting, legal assistance, engineering, medicine, and so on. The United States is a major exporter of services generally and runs a sizable trade surplus in services. In 2002, for example, service exports accounted for 30 percent of all U.S. exports and exceeded service imports by $64.8 billion. Accordingly, the increasing ability to provide services remotely is a commercial boon to many U.S.-based service industries. Although some jobs are doubtless at risk, the same trends that make offshoring possible are creating new opportunities, and new jobs, throughout the domestic economy.

8. Offshoring Creates New Jobs and Boosts Economic Growth

Although offshoring does eliminate jobs, it also yields important benefits. To the extent that companies can reduce costs by shifting certain operations overseas, they are increasing productivity. The process of competition ultimately passes the resulting cost savings on to consumers, which then spurs demand for other goods and services. Whether caused by the introduction of new technology or by new ways to organize work, productivity increases translate into economic growth and rising overall living standards.

In particular, offshoring encourages the diffusion of I.T. throughout the American economy. According to Catherine Mann at the Institute for International Economics, globalized production of I.T. hardware -- that is, the offshoring of computer-related manufacturing -- has accounted for 10 percent to 30 percent of the drop in hardware prices. The resulting increase in productivity encouraged the rapid spread of computer use and thereby added some $230 billion in cumulative additional GDP between 1995 and 2002.

Offshoring offers the potential to take a similar bite out of prices for I.T. software and services. Those price reductions will promote the further spread of I.T. and new business processes that take advantage of cheap technology. As Mann notes, health services and construction are two large and important sectors that today feature low I.T. intensity (as measured by I.T. equipment per worker) and below-average productivity growth. Diffusion of I.T. into these and other sectors could prompt a new round of productivity growth such as that provoked by the globalization of hardware production during the 1990s.

9. The Digital Revolution Has Been Eliminating White-Collar Jobs for Many Years

The attention now being paid to offshoring creates the impression that it is an utterly unprecedented phenomenon. But the very same technological advances that are making offshoring possible have been eliminating large numbers of white-collar jobs for many years now.[/b]

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[RS Davis]

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The diffusion of I.T. throughout the economy has caused major shakeups in the job market during the last decade. Voicemail has replaced receptionists; back-office record-keeping and other clerical jobs have been supplanted by computers; layers of middle management have been eliminated by better internal communications systems. In all these cases, jobs are not simply being transferred overseas; they are being consigned to oblivion by automation and the resulting reorganization of work processes.

The increased churn in white-collar jobs shows up in the Department of Labor’s statistics on displaced long-tenured workers, defined as workers who have lost jobs they held for three years or more (Figure 5). During the 1981--82 recession blue-collar workers bore the brunt of long-tenured displacement, but by 1991-92 more than half of the long-held jobs lost were white-collar. Even in the better years that followed, innovation and job churn continued to displace white-collar workers at a higher rate than during the 1981-82 recession.

Offshoring is merely the latest manifestation of a well-established process. The only difference is that, with offshoring, I.T. is facilitating the transfer of jobs overseas. In either case, domestic jobs are lost to technological progress and rising productivity. Why is this downside taken in stride when jobs are eliminated entirely yet considered unbearable when the jobs are taken as hand-me-downs by Indians and other foreigners?

10. Fears That the U.S. Economy Is Running Out of Jobs Are Nothing New

Because of the recent recession, the U.S. economy has suffered from a shortage of jobs, as evidenced by the rise in the unemployment rate. There is a natural temptation under these conditions to fear that this temporary setback is the beginning of some permanent reversal of fortune, that the shortage of jobs is here to stay and will only grow worse.

To calm such fears, it is useful to recall that similar anxieties have surfaced before. Again and again, over many decades, cyclical downturns in the economy have prompted predictions of permanent job shortages. And each time, those predictions were belied by the ensuing economic expansion.

Back in the 1930s, the brutal and persistent unemployment caused by the Great Depression gave rise to theories of "secular stagnation." A number of leading economists -- including, most prominently, Harvard’s Alvin Hansen -- argued that declining population growth and the increasing "maturity" of the industrial economy meant that we could no longer rely on private-sector job creation to provide full employment. The stagnationist thesis eventually fell out of fashion once the postwar economic boom gathered steam.

The return of higher unemployment in the late 1950s and early ’60s led to a revival of the stagnationist fallacy, this time in the guise of an "automation crisis." The ongoing progress of factory automation, combined with the growing visibility of electronic computers, led many Americans to believe, once again, that the economy was running out of jobs. During the 1960 presidential campaign, John F. Kennedy, who ran on a pledge to "get the country moving again," warned that automation "carries the dark menace of industrial dislocation, increasing unemployment, and deepening poverty." The American Foundation on Automation and Unemployment, a joint industry-labor group created in 1962, claimed breathlessly that automation was "second only to the possibility of the hydrogen bomb" in its challenge to America’s economic future. For the record, U.S. employment in 1962 stood at 66.7 million jobs -- roughly half the current total.

In the early 1980s, the coincidence of a severe recession and a string of competitive successes by Japanese producers at the expense of high-profile American industries sparked predictions of the imminent "deindustrialization" of the American economy. As financier Felix Rohatyn complained, in a fashion typical of the time, "We cannot become a nation of short-order cooks and saleswomen, Xerox-machine operators and messenger boys....These jobs are a weak basis for the economy." Along similar lines, Sen. Lloyd Bentsen (D-Texas) fretted that "American workers will end up like the people in the biblical village who were condemned to be hewers of wood and drawers of waters." It should be noted that U.S. manufacturing output has roughly doubled since 1982.

In the early 1990s, another recession resulted in yet another job shortage scare. Ross Perot won 19 percent of the presidential vote in 1992 with a campaign that, among other things, railed against the "giant sucking sound" of jobs lost to Mexico and other foreign countries. That same year, Pulitzer Prize-winning journalists Donald L. Barlett and James B. Steele published a widely discussed jeremiad, America: What Went Wrong?, about the decline and fall of the country’s middle class. That hand wringing was followed in short order by one of the most remarkable expansions in American economic history.

Again and again, serious and influential voices have raised the cry that the sky is falling. It never does. The root of their error is always the same: confusing a temporary, cyclical downturn with a permanent reduction in the economy’s job-creating capacity.

In recent years, many Americans have lost their jobs and suffered hardship as a result. Many more have worried that their jobs would be next. There is no point in denying these hard realities, but just as surely there is no point in blowing them out of proportion. The U.S. economy is not running out of good jobs; it is merely coming out of a recession. And regardless of whether economic times are good or bad, some amount of job turnover is an inescapable fact of life in a dynamic market economy.

This fact cannot be wished away by blaming foreigners, and it cannot be undone by trade restrictions. The innovation and productivity increases that render some jobs obsolete are also the source of new wealth and rising living standards. Embracing change and its unavoidable disruptions is the only way to secure the continuing gains of economic advancement.


Brink Lindsey is a senior fellow at the Cato Institute and director of its Center for Trade Policy Studies. He is the author of Against the Dead Hand: The Uncertain Struggle for Global Capitalism (John Wiley & Sons). This article is based on a longer paper published by the Cato Institute, available online (PDF) . Sources for all the figures in this article are available in the original Cato study.