By Knowledge Wharton. Originally published at ValueWalk.
They stole our jobs.
Plentiful, high-paying spots on assembly lines were once a powerhouse component in the employment mix in the U.S. President-elect Donald Trump’s campaign trafficked heavily in the idea that it’s time to wrest these jobs back to our shores and return the American worker to a dependable middle class existence. The message was met with eager ears, especially in parts of the traditional U.S. manufacturing base.
Manufacturing
Now, as a Trump administration heads for the White House, will it be able to deliver on the promise to bring back these jobs? Just this week, air conditioner company Carrier announced that it had reached an agreement with Trump to keep 1,000 jobs in Indiana, where Vice President-elect Mike Pence is governor. If Trump pulls out of NAFTA, cancels U.S. participation in the Trans-Pacific Partnership or sparks a trade war with China and Mexico, will he be able to turn back the clock to the glory days of American manufacturing?
Actually, America makes more than ever. Still, Wharton management professor Ann Harrison says the plight of workers caught in a changing economy cannot be ignored. “If a manufacturing worker moves to work in the service sector, that worker’s wage actually does fall,” she notes. “Wages can fall 20%, so there is a wage premium attached to a manufacturing job. It is true that these jobs are in some sense good jobs, and I understand why a lot of workers hurt by trade would want their jobs back.” The sentiment is real, and some people have been hurt by trade, and that is why Trump’s message resonates with them, Harrison adds. “Having said that, the simple solution of trying to stop trade will not work — the ship has already sailed. So to try to bring those jobs back through tariffs is going to actually make things worse.”
No one “stole” America’s jobs, of course. Many companies moved them overseas, simultaneously increasing profits and reducing the price of products for the American consumer. Bringing back jobs would generally result in higher prices, which would have other implications for the economy as a whole. “The basic question is, why have these manufacturing jobs left the U.S., and what would be the real cost of bringing them back? And I think the answer is that it’s going to be very high,” says Wharton emeritus professor of management Stephen J. Kobrin. “Some surveys say some people are willing to pay more for products that are in made in the U.S. But how much more — 5%, 10%?”
“Some surveys say some people are willing to pay more for products that are made in the U.S. But how much more — 5%, 10%?” –Stephen J. Kobrin
Trump has reversed course on any number of campaign promises since November’s election. He has, however, amplified calls for tariffs and other measures in recent weeks, saying he will issue an intent to withdraw from the Trans-Pacific Partnership “from day one,” and instead “negotiate fair bilateral trade deals that bring jobs and industry back.” These may be, of course, just starting points for putting new deals in place. Carrier’s recent decision to not move as many jobs out of the U.S. as it had once planned came after a highly publicized push from Trump — but it isn’t likely to change the dynamics of where manufacturing jobs go. And so, as it becomes increasingly clear to Trump and his team that the ability to “bring back jobs” is inextricably tied to the greater health of the U.S. economy — not to mention the balance of power in Asia – what will they do, and how will the millions who voted for him react?
“What happens when people realize they’ve been taken?” asks Kobrin, who is also publisher and executive editor of Wharton Digital Press. “When people realize that he can’t bring back jobs and that they are not better off than they were two years ago, how does he use it — who does he blame it on? Are people going to believe that he failed because of the basic structural conditions, or because of some dark force opposing him that needs to be overcome? I think that’s a serious issue.”
The Costs of Reshoring
The biggest reason Trump — or anyone else — can’t bring back jobs is because there is nowhere to bring them back from. They have been lost in large part to the success of efficiency. Manufacturing output in the U.S. was at an all-time high in 2015. Over the past three-and-a-half decades, manufacturers have shed more than seven million jobs while producing more stuff than ever.
U.S. manufacturing had gross output of $5.9 trillion in 2013, more than one-third of the U.S. GDP that year, according to the Economic Policy Institute (EPI). “Manufacturing is by far the most important sector of the U.S. economy in terms of total output and employment,” the EPI reported in The Manufacturing Footprint and the Importance of U.S. Manufacturing Jobs from 2015. The manufacturing sector supported approximately 17.1 million indirect jobs in the U.S., in addition to the 12 million persons directly employed in manufacturing, for a total of 29.1 million jobs — or more than one-fifth (21%) of total U.S. employment in 2013.
Still, the sector has lost millions of jobs, so where have they gone? “If you try to understand how so many jobs have disappeared, the answer that you come up with over and over again in the data is that it’s not trade that caused that — it’s primarily technology,” says Harrison. “Eighty percent of lost jobs were not replaced by workers in China, but by machines and automation. That is the first problem if you slap on tariffs. What you discover is that American companies are likely to replace the more expensive workers with machines.”
“Eighty percent of lost jobs [in the U.S.] were not replaced by workers in China, but by machines and automation.” –Ann Harrison
The other problem, Harrison points out, is that a lot of what the U.S. exports is dependent on a supply chain that uses components produced cheaply elsewhere. “So if we slap tariffs on Mexico and China, it will make our own manufacturing less competitive,” she says. Starting a trade war with Mexico, China or both would mean that “the most likely immediate consequence is that they are going to turn around and play the same game by putting tariffs on things we produce for the world, so Mexico would likely slap tariffs on our agricultural exports, which are massive, and China would put a tariff on highly sophisticated machinery. If that escalates you end up in a situation where the economy is worse off.”
It is also important to remember that jobs have been both gained and lost due to trade, says Wharton management professor Mauro Guillen, director of The Lauder Institute. “We have gained jobs thanks to NAFTA, jobs that were in Europe and Japan,” he notes. “In the 1990s, after NAFTA came into effect, companies like Toyota, Nissan, Mercedes and BMW established plants in Alabama, South Carolina, Tennessee and other states, for
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