NAFTA and MANUFACTURING EMPLOYMENT

President Trump is not alone in blaming NAFTA for the decline in US manufacturing employment over the last several decades.  Many people on all sides of the political spectrum believe the same thing.  But as this chart demonstrates the economic data tells a very different story.nafta manuf

 

In the decade after NAFTA came into being, manufacturing output growth actually accelerated  to an average annual growth rate of 3.7% as compared to an average annual growth rate of 2.9%  in the decade before NAFTA was implemented. However, while manufacturing output growth actually  accelerated, the average annual growth rate of manufacturing employment weakened from -0.4% to -1.3%.  This was because the rate of growth in productivity or output per employment jumped about 50% from 3.3% to 5.0%.  The big jump in the growth of output per employee or productivity was the dominant factor in the drop in manufacturing employment.  Automation or  information technology accounted for  virtually all of the weakness in manufacturing employment after NAFTA.    NAFTA was a factor, but it was clearly a relatively minor factor.  The way NAFTA contributed was for low productivity industries like textiles and autos  to move abroad while high productivity industries like semiconductors grew rapidly so that the composition of US manufacturing changed drastically.   Because of this, Trumps policy of bring jobs back from overseas is almost certain to fail.

The important question is not why his policy will fail.  Rather, it is what will Trump do after it becomes obvious to everyone that it has failed.

If you want to blame the trade deficit for the drop in manufacturing employment, it obviously played a role.  But Mexico only accounts for some 5% to 10% of the US trade deficit,  so even on this basis, NAFTA played a very minor role in the drop in US manufacturing employment.

 

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