U.S. manufacturing employment and international integration

12 February 2017

President Donald Trump wants to put “America first” by changing the nature of U.S. international engagements. He proclaims that the U.S. has not benefitted equally from the international economic order. In 1945, President Franklin Roosevelt called "citizens of the United States, to use our influence in favour of a more united and cooperating world."1 This has laid the foundation for international integration and cooperation following economic decline during the inter-war period amid mounting economic protectionism and political radicalisation. Trump now seems willing to move the U.S. further away than ever from Roosevelt's economic policy ideals. Moreover, the President uses erroneous pretenses to do so.

Roosevelt advanced an unparalleled vision for a new international economic order that rested in large part on multilateral cooperation. In 1945, he stressed that “[w]e shall need prosperous markets in the world to ensure our own prosperity, and we shall need the goods the world can sell to us.” This was based on the belief that “[a]lmost no one in the modern world produces what he eats and wears and live in. It is only the division of labor among people and among geographic areas with all their varied resources, and by the increased all-around production which specialisation makes possible, that any modern country can sustain its present population. It is through exchange and trade that efficient production in large units becomes possible. To expand the trading circle, to make it richer, more competitive, more varied, is a fundamental contribution to everybody’s wealth and welfare.”2

International integration and peace were seen as highly inter-dependent. The incentives to cooperate were considered critical to establish common welfare and minimise adverse external spill-overs: “[G]overnments […] are highly effective and resolved to work together in practical affairs, and to guide all their actions by the knowledge that any policy or act that has effects abroad must be considered in the light of those effects.”3

President Trump in contrast sees the U.S. weakened by its international relations: “Americans must know that we’re putting the American people first again on trade. […] We will no longer surrender this country or its people to the false song of globalism. The nation-state remains the true foundation for happiness and harmony. I am sceptical of international unions that tie us up and bring America down and will never […] enter America into any agreement that reduces our ability to control our own affairs. NAFTA, as an example, has been a total disaster for the United States and has emptied our states—literally emptied our states of our manufacturing and our jobs.”4

The relationship between manufacturing employment and international openness is ambiguous. There is no doubt that lower productivity-adjusted labour costs abroad have moved employment abroad. However, it is also clear, that the decline of manufacturing employment in the U.S. has started a long time ago well before NAFTA (Chart 1).

The U.S. has remained a relatively close economy. While, openness, the sum of exports and imports of goods and services, of OECD countries on average represents 58 percent of GDP in 2014 and is significantly higher for smaller open economies like Germany and Korea, it is only 30 percent for the U.S. (Chart 2). The U.S. similar to other large economies like Japan depend less on the rest of the world and therefore is less influenced by external economic forces.

The different visions of Roosevelt and Trump of how to attain the same objective of high employment and prosperity naturally poses a dilemma. Either, the economic forces determining prosperity have changed or Trump’s claim that openness has reduced manufacturing employment is wrong. The combination of loss of manufacturing employment and the persistent relative closeness of the U.S. economy suggests that forces other than exports and imports have transformed the U.S. labour market. The notion that less openness would bring more manufacturing employment is therefore misleading. The culprit of the decline of U.S. manufacturing employment is not to be found in international integration.

U.S. manufacturing employment

OECD trade openness

1 The President’s Message to Congress, Bretton Woods, U.S. Treasury, 20 February 1945, Washington, D.C. Special message to Congress urging adoption of the Bretton Woods proposals for an International Monetary Fund and an International Bank for Reconstruction and Development.

2 Idem.

3 Idem.

4 Donald Trump’s ‘America First’ foreign policy speech, Time, 27 April 2016, http://time.com/4309786/read-donald-trumps-america-first-foreign-policy-speech/