A new working paper by Peter Schott, professor of economics at the Yale School of Management, and co-author Justin Pierce, an economist at the Board of Governors of the Federal Reserve, links the sharp decrease in U.S. manufacturing employment after 2001 to a substantial shift in U.S. trade policy towards China in late 2000.
“While trade with China is a prime suspect in the overall loss of U.S. manufacturing jobs in recent decades,” says Schott, “what’s interesting about the change in policy we study is that it did not affect the level of tariffs the U.S. applied to Chinese imports. Rather, it eliminated uncertainty about those tariffs.” Before 2000, Chinese imports into the United States enjoyed the same low tariffs that the U.S. applies to other countries with which it has “normal trade relations” (NTR). In China’s case, however, this NTR status was subject to politically contentious annual renewals. With the October 2000 change in policy, China’s NTR status became permanent.
Pierce and Schott show that U.S. manufacturing employment losses starting in 2001 are concentrated in industries where a failed annual re-approval would have resulted in the sharpest increase in tariffs. They also show that these same industries see a large rise in U.S. imports from China as well as in the number of U.S. firms that import from China.
The impact on U.S. manufacturing employment is quite large. “According to our estimates, employment growth in the average industry was 30% lower between 2001 and 2007 than it would have been had the decline in uncertainty not occurred,” says Schott. Their analysis shows that these losses are due both to an absence of job creation as well as heightened job destruction.
Schott notes that while the change in U.S. policy is painful for the workers who lost their jobs, the U.S. as a whole benefits from countries trading according to their comparative advantage. He points out that while U.S. manufacturing employment fell substantially in the years after 2001, manufacturing value added continued to rise. “This large implied increase in labor productivity reflects changes both in the types of goods U.S. manufacturers produce as well as in the techniques they use to make them,” says Schott.