Tuesday 31/03/2020

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The Chinese or the robot: who did it?

Chief Economist

There is no consensus about the cause of job losses in the American manufacturing industry. Some look to countries like China and Mexico and so place the blame on globalisation. Largely in response to Trump, many observers in recent weeks are pointing almost exclusively to automation as the reason for falling employment. So, what’s the cause?

Eerst de cijfers. Tussen 1970 en 2000 was de tewerkstelling in de Amerikaanse nijverheid relatief stabiel en varieerde ze rond de 17-18 miljoen werkers. Vanaf 2000 volgde echter een sterke daling en gingen er maar liefst vijf miljoen banen verloren, waarvan 1,3 miljoen sinds de start van de Grote Recessie. De industrie kent doorgaans snellere productiviteitsstijgingen dan de dienstensector. Liet de brede Amerikaanse economie tussen 2000 en 2015 een productiviteitsgroei optekenen van rond de 20% dan was dat in de verwerkende nijverheid meer dan dubbel zo snel. De aanhangers van de robot-theorie lijken hun slag binnen te halen.

First the figures. Employment in American industry was relatively stable between 1970 and 2000, fluctuating around 17 to 18 million workers. However, this was followed by significant drop starting in 2000 when a considerable five million jobs were lost, 1.3 million of which have been lost since the start of the Great Recession. Industry has generally undergone faster productivity increases than the services sector. The broader American economy was able to record a growth in productivity of around 20% between 2000 and 2015, while for the manufacturing industry this growth happened at more than double that speed. Supporters of the robot theory seem to have won.

Not so fast

However, when we scrutinise the figures, the tale of a huge productivity increase grows rather precarious. Within the manufacturing industry, a fairly small branch (computers including semiconductors and electrical devices) is largely responsible for the sector’s solid growth in productivity as a whole. Without that fantastic performance in the computer segment, there isn’t much quick growth in productivity in the manufacturing industry to be seen. A second relevant point is that the enormous increase of added value in the computer industry can be explained in the way that statisticians calculate the substantial improvement of those computer-related products. A computer that you purchase today might cost just as much as last year, but it has more options and it’s faster. That is undeniable technological progress, based on research and development, but that greater added value isn’t necessarily the result of automation. It doesn’t sufficiently explain why 750,000 jobs have been lost in the American computer industry since 2000.

China’s role

Here, there’s definitely more going on. Falling employment in American industry cannot be viewed separately from the international emergence of China, especially China’s joining of the World Trade Organisation in 2001. As a result of this, the United States’ trade deficit with China increased sharply. There is a clear overlap between the sectors in the manufacturing industry that saw a significant drop in employment and the sectors that were most exposed to competition with China. Research at MIT has shown that round 2.2 million jobs were lost between 1999 and 2011 due to increased competition with China. Trump has a solid point in that regard. Attributing everything to automation is taking it too far.

However, Trump is wrong if he thinks that he can recuperate those jobs quickly by focusing on China. American companies would probably look for alternative import options. He could also take measures with regard to other countries, but there is a real chance of starting an all-out trade war in which everyone loses. After all, the global business chain is very complex and products are seldom manufactured exclusively in one country. The Republican Party’s plans to reform the tax system will also have shortcomings. It is likely to drive up the value of the dollar and undermine industrial competitiveness.

The conclusion is that globalisation definitely played a role in the loss of American industrial employment. And there is only a paltry chance that Trump will be able to bring back those lost jobs with a protectionist policy. And in the meantime, those robots won’t be resting on their laurels either…