Undoubtedly, the emergence of persistent trade deficits in manufactured goods has contributed to the declining share of manufacturing in the U.S. economy. The question is how large that contribution has been. In 1970 manufactured exports exceeded imports by 0.2 percent of GDP. Since then, there have been persistent deficits, reaching a maximum of 3.1 percent of GDP in 1986. By 1990, however, the manufacturing deficit had fallen again, to only 1.3 percent of GDP. The decline in the U.S. manufacturing trade position over those two decades was only 1.5 percent of GDP, less than a quarter of the 6.6 percentage point decline in the share of manufacturing in GDP.
Moreover, the raw value of the trade deficit overstates its actual effect on the manufacturing sector. Trade figures measure sales, but the contribution of manufacturing to GDP is defened by value added in the sector -- that is, by sales minus purchases from other sectors. When imports displace a dollar of domestic manufacturing sales, a substantial fraction of that dollar would have been spent on inputs from the service sector, which are not part of manufacturing’s contribution to GDP.
To estimate the true impact of the trade balance on manufacturing, one must correct for this “leakage” to the service sector. Our analysis of data from the U.S. Department of Commerce puts the figure at 40 percent. In other words, each dollar of trade deficit reduces the manufacturing sector’s contribution to GDP by only 60 cents. This adjustment strengthens our conclusion: if trade in manufactured goods had been balanced from 1970 to 1990, the downward trend in the size of the manufacturing sector would not have been as steep as it actually was, but most of the deindustrialization would still have taken place. Between 1970 and 1990 manufacturing declined from 25.0 to 18.4 percent of GDP; with balanced trade, the decline would have been from 24.9 to 19.2, about 86 percent as large.
International trade explains only a small part of the decline in the relative importance of manufacturing to the economy. Why, then, has the share of manufacturing declined? The immediate reason is that the composition of domestic spending has shifted away from manufactured goods. In 1970 U.S. residents spent 46 percent of their outlays on goods (manufactured, grown or mined) and 54 percent on services and construction. By 1991 the shares were 40.7 and 59.3 percent, respectively, as people began buying comparatively more health care, travel, entertainment, legal services, fast food and so on. It is hardly surprising, given this shift, that manufacturing has become a less important part of the economy.
In particular, U.S. residents are spending a smaller fraction of their incomes on goods than they did 20 years ago for a simple reason: goods have become relatively cheaper. Between 1970 and 1990 the price of goods relative to services fell 22.9 percent. The physical ratio of goods to services purchased remained almost constant during that period. Goods have become cheaper primarily because productivity in manufacturing has grown much faster than in services. This growth has been passed on in lower consumer prices.
Ironically, the conventional wisdom here has things almost exactly backward. Policymakers often ascribe the declining share of industrial employment to a lack of manufacturing competitiveness brought on by inadequate productivity growth. In fact, the shrinkage is largely the result of high productivity growth, at least as compared with the service sector. The concern, widely voiced during the 1950s and 1960s, that industrial workers would lose their jobs because of automation is closer to the truth than the current preoccupation with a presumed loss of manufacturing jobs because of foreign competition.
Because competition from abroad has played a minor role in the contraction of U.S. manufacturing, loss of jobs in this sector because of foreign competition can bear only a tiny fraction of the blame for the stagnating earnings of U.S. workers. Our data illuminate just how small that fraction is. In 1990, for example, the trade deficit in manufacturing was $73 billion. This deficit reduced manufacturing value added by approximately $42 billion (the other $31 billion represents leakage -- goods and services that manufacturers would have purchased from other sectors). Given an average of about $60,000 value added per manufacturing employee, this figure corresponded to approximately 700,000 jobs that would have been held by U.S. workers. In that year, the average manufacturing worker earned about $5,000 more than the average nonmanufacturing worker. Assuming that any loss of manufacturing jobs was made up by a gain of nonmanufacturing jobs -- an assumption borne out by the absence of any long-term upward trend in the U.S. unemployment rate -- the loss of “good jobs” in manufacturing as a result of international competition corresponded to a loss of $3.5 billion in wages. U.S. national income in 1990 was $5.5 trillion; consequently, the wage loss from deindustrialization in the face of foreign competition was less than 0.07 percent of national income.