Donald Trump: Errors in Diagnosis and Cure Robert Z Lawrence - PowerPoint PPT Presentation

Donald Trump: Errors in Diagnosis and Cure Robert Z Lawrence Albert L Williams Professor of Trade and Investment Harvard Kennedy School

Agenda. • Introduction: Why Manufacturing Employment matters • Part1: Deindustrialization in the USA • Part 2: Is Trade Protection the Answer? • Implications.

US Manufacturing employment since 2000 down almost 6 million

Devastating Consequences. Manufacturing jobs were important especially for less- educated men in the USA. Deindustrialization said to be key in black urban problems and many cities in the midwest. MasterCard Presentation

For Many the explanation is trade. Especially with Mexico and China US merchandise imports, 1978 – 2008 Ratio to GDP (current dollars) 0.07 0.06 0.05 0.04 0.03 Industrial 0.02 Non-OPEC other 0.01 0 OPEC = Organization of Petroleum Exporting Countries Source: Bureau of Economic Analysis

Older White Men Are the Most Negative on Free Trade Deals Free trade agreements between the U.S. and other countries have been a __ for the United States Good thing Bad thing % % TOTAL Population 51 39 White men men 40 40 52 52 18-29 56 35 30-49 41 51 50 50-64 64 34 34 63 63 65+ 65 33 33 55 55 • Note: Whites include only those who are not Hispanic. • Source: Pew Research Center Survey, March 17-27, 2016. March 6, 2017 www.pewresearch.org 6

Trump Supporters View FTAs as Bad for U.S. Registered voters who say free trade agreements have been a __ for the United States Bad thing Good thing All voters 43% 47% Rep/Lean Rep 53 38 Dem/Lean Dem 34 56 Among Republicans/ ns/Le Lean n Rep, Rep, support t ... Trump 67 27 Cruz 40 48 Kasich 46 44 Among Democrats ats/Le /Lean n Dem, support t ... Clinton 31 58 Sanders 38 55 • Note: Based on registered voters. Don’t know responses not shown. • Source: Pew Research Center Survey, March 17-27, 2016. March 6, 2017 www.pewresearch.org 7

Tru rump Su Supporters Sa Say They Have Been Har armed by y Fr Free Trad ade Registered voters who say free trade agreements have __ the financial situation of their family Definitely/ Definitely/ Probably hurt Probably helped All voters 39% 42% Rep/Lean Rep 48 36 Dem/Lean Dem 32 48 Among Republicans/ ns/Le Lean n Rep, support t ... Trump 60 26 Cruz 36 45 Kasich 42 42 Among Democrats ats/Le /Lean n Dem, support t ... Clinton 29 51 Sanders 36 46 • Note: Based on registered voters. Don’t know responses not shown. • Source: Pew Research Center Survey, March 17-27, 2016. March 6, 2017 www.pewresearch.org 8

Yet the Trend in US manufacturing share of employment has not changed. Manufacturing share in establishment employment, 1961 – 2010 share 0.35 0.3 0.25 0.2 0.15 Share 0.1 Fitted trendline Forecast 0.05 0 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Source: Bureau of Labor Statistics

And Typical! ! Decline in manufacturing share of employment is similar across advanced economies Share of employment in manufacturing, 1973 – 2010 (percent) Country 1973 1990 2000 2010 Change (1) (2) (3) (4) (4) - (1) United States 24.8 18.0 14.4 10.1 -14.7 Canada 22.0 15.8 15.3 10.3 -11.7 Australia 23.3 14.4 12.0 8.9 -14.4 Japan 27.8 24.3 20.7 16.9 -10.9 France 28.8 21.0 17.6 13.1 -15.7 Germany 36.7 31.6 23.9 21.2 -15.5 Italy 27.9 22.6 23.6 18.8 -9.1 Netherlands 25.3 19.1 14.8 10.6 -14.7 Sweden 27.6 21.0 18.0 12.7 -14.9 Source: Bureau of Labor Statistics.

Even Countries with large trade surpluses in manufacturing!

So others point to technology: especially automation

But What About Demand? Share of Goods in US Consumption Spending 1950 -2010 Source: Boppart. (2014)

Consumption Shares in Goods: Falling In all industrial countries Manufacturing and Services are complements. Cheaper manufactured goods increases demand for services!

Rapid productivity growth is reflected in prices Measures of relative manufacturing productivity and prices, 1960 – 2007 1.4 1.3 1.2 index (1995 = 1) 1.1 1 0.9 0.8 0.7 Productivity relative to GDP 0.6 Price of goods relative to GDP (inverse) 0.5 0.4 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Spending on goods relative to services: Prices fall but Quantities rise slowly US spending on goods relative to services, 1960 – 2010 1.2 Prices 1.0 Quantities Log Scale (2010 = 0) 0.8 Values 0.6 0.4 0.2 0.0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 -0.2 -0.4 Declining shares of nominal spending on goods relative to services

Consumption Spending Share on Goods by Quintile Poorest Richest Source: Boppart (2014) Econometrica

Manufacturing employment, actual and without trade deficit: different levels, similar decline after 2000 Manufacturing employment, actual and adjusted for the manufacturing trade deficit, 1990 – 2010 25 actual and adjusted manufacturing employment (millions) 20 15 10 Actual manufacturing employment 5 Employment without trade deficit Edwards and Lawrence (2013) 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Examples of peak manufacturing shares Peak Share Per capita Income (2015 ppp dollars) USA 1953 25 percent $17,977 UK 1961 32 percent $ 15,214 South Africa 1981 17 percent $11,776 Brazil 1986 15.4 percent $11,492 China 2010 19.2 percent $9,876

Share 0.05 0.15 0.25 0.35 Below US and UK at same levels of GDP Per capita 0.1 0.2 0.3 BRICS Manufacturing Employment Share far 0 0.54 0.59 0.64 0.68 0.71 0.76 0.80 0.84 0.87 0.94 1.04 1.11 1.30 1.52 1.70 1.83 1.93 2.13 2.42 2.51 2.70 2.95 3.09 3.29 3.54 3.65 3.80 3.91 3.99 4.11 4.19 4.30 4.48 4.70 4.89 Log GDP Per Capita 4.94 5.17 5.28 5.47 5.93 6.51 7.12 7.93 8.65 9.57 10.12 10.63 10.94 11.40 12.03 12.75 13.17 14.08 14.77 15.39 16.25 16.69 17.94 18.79 china safrica india brazil uk usa

Conclusions: Closing the trade deficit would mean more manufacturing jobs… • Trade a small share of overall displacement …but it’s like walking up • Most deindustrialization in a downward escalator advanced countries due to the interaction of technological change and inelastic demands in response to declining prices and income growth.

I-Phone: Made in the World $11, U.S. While America doesn't make much of what goes into the iPhone, it's always better to innovate than to fabricate; just see Apple's profit $61, JAPAN. It doesn't innovate as much as the $23, SOUTH KOREA U.S., but its tech prowess means a lot of high-end manufacturing value stays there $7, CHINA. Often more of an $30, GERMANY assembly line for other nation's wares, work here accounts for only 3.6% of an iPhone's production cost $48, UNSPECIFIED The other $320? Apple’s profit. Source: Time Magazine, “Adding Up the iPhone,” May 16, 2011.

Even the USA BOEING is made in the world.

China: Manufactured Exports in 2012 40 percent of Value Imported.

US Car Seat by ADIENT