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Trading in Trump’s Lies

The loss of US manufacturing employment over the past three decades is undoubtedly a significant problem; but anyone who blames this trend on “bad” trade deals is playing the fool. NAFTA, for example, accounts for only a vanishingly small share of the decline.

BERKELEY – In a recent Vox essay outlining my thinking about US President Donald Trump’s emerging trade policy, I pointed out that a “bad” trade deal such as the North American Free Trade Agreement is responsible for only a vanishingly small fraction of lost US manufacturing jobs over the past 30 years. Just 0.1 percentage points of the 21.4 percentage-point decline in the employment share of manufacturing during this period is attributable to NAFTA, which was enacted in December 1993.

A half-century ago, the US economy supplied an abundance of manufacturing jobs to a workforce that was well equipped to fill them. Today, many of those opportunities have dried up. This is undoubtedly a significant problem; but anyone who claims that the collapse of US manufacturing employment resulted from “bad” trade deals is playing the fool.

The facts about the declining US manufacturing employment are plain; there are no “alternatives.” The primary culprits are productivity growth and limited demand, which cut the share of nonfarm employees in manufacturing from 30% in the 1960s to 12% a generation later. That share fell further, to 9% because of misguided macroeconomic policies, especially during the Reagan era, when deficit spending and overly tight monetary policy caused the dollar to soar, undermining competitiveness. After this period, the US abdicated its proper role as a net exporter of capital and finance, and less developed economies became net sources of investment funds. Finally, China’s extraordinarily rapid rise pushed the employment share of manufacturing down to 8.7%; NAFTA took it to 8.6%.

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