How imports boost employment

Moving high-cost, low-skill manufacturing back to the US might prove to be counterproductive in the long run

By Anne Krueger  / 

Wed, Mar 01, 2017 - Page 9

According to today’s populists, “good jobs” in US manufacturing have been “lost” to competition from imports and preferential trading arrangements, but this narrative does not fit the facts, because imports create jobs, too.

For starters, many jobs are directly connected to trade. Think of the longshoremen who load and unload cargo, the pilots and crews who transport goods by air, the truckers who do so by land and the wholesale and retail workers who stock and sell those goods.

Second, imports often provide cheaper inputs than what is available in the US, which enables US manufacturers to better compete with foreign firms in export markets and to maintain their share of domestic markets.

Third, foreign direct investment helps US companies acquire some inputs at less cost, while engaging in more research and development and other activities.

Last, but not least, exporting to the US gives foreigners more income with which to buy imports from the US and other countries. As export industry jobs usually require more valuable skills, and thus pay more than jobs in industries that compete with imports, the additional exports generated by imports create better jobs overall.

Without imports, many jobs that exist today would disappear. According to some estimates, the jobs that service an imported consumer good account for more than half of its retail price. Many imports require local service facilities with US workers. For example, foreign automobiles would not be sold if the parts and mechanics for servicing them were unavailable.

For any manufactured good or line of goods, the production process typically involves several steps. Some steps require considerable engineering and technical skills and others entail relatively low-skilled employment. As the US labor force is highly skilled overall, US companies have an advantage over their foreign competitors.

However, US firms that rely on components produced by unskilled labor must either make those components themselves, or buy them from high-cost domestic sources. This can put them at a cost disadvantage if they are competing with companies in other industrial countries that can import the same inputs for less, or with companies in countries where unskilled labor is cheaper.

On the other hand, when US firms can import low-skill inputs for less than it would cost to produce those inputs themselves, they can reduce the price of their final product. This allows them to fend off foreign competitors at home and compete more effectively abroad. Germany and Japan have expensive skilled labor forces, but their firms are able to compete in world markets precisely because they can outsource high-cost, low-skill production stages.

Low-cost imports, rather than “destroying” US jobs, actually sustain them. In addition, when companies can expand as a result of their improved competitiveness at home and abroad, they create even more jobs. However, if firms must purchase higher-cost domestic inputs, they would have to reduce their profits or raise the price of their products. With reduced profits, they will be less likely to expand and hire more workers; and if they lose money, they might have to shed workers. However, raising prices is likely to mean losing market share, implying fewer employees to meet demand.

Foreign direct investment often also helps save jobs in the US, when firms facing competition from abroad must choose between offshoring their unskilled labor activities and going out of business. Offshoring certain components can increase the overall profitability of the production process, but it can also require companies to release intellectual property rights and know-how. With foreign direct investment, companies can maintain control over proprietary processes and expand employment in their head office or US facilities.

One last consideration is that exporting countries would have to correct their balance of payments if their export earnings drop significantly. For example, if the US decides to curtail imports, many of its trading partners would reduce their imports, too, because they will no longer be able to finance them. Export earnings finance imports for most of the world, so if US imports drop, US exports would fall by approximately the same amount.

If that happens, export industry jobs would be lost, together with the jobs created by imports. Even if some of the longshoremen, truckers, head office employees and others find new jobs in the industries that replace import servicing sectors, they would likely have to take a pay cut.

Given these dynamics, why has manufacturing as a share of overall employment in the US decreased? Import competition and preferential trade arrangements such as the 1994 North American Free Trade Agreement share the brunt of the blame these days. However, neither of these became relevant factors until long after manufacturing employment — which peaked in the late 1970s — had already started to decline.

One partial explanation is that companies have subcontracted more services, so the share of direct employment in manufacturing might appear to have fallen, even though the number of jobs associated with a firm’s production might not have changed.

However, most analysts attribute the decline in manufacturing employment to improved productivity. US businesses had no choice but to develop or adopt new techniques, processes and technologies to stay competitive. For manufacturing employment to have kept up with the sector’s increased output and value added, the demand for manufactured goods would have had to rise much faster than it did, or Americans would have had to choke off productivity growth. The latter option is the surest way to make the US poor again.

Anne Krueger, a former World Bank chief economist and former first deputy managing director of the IMF, is a senior research professor of international economics at Johns Hopkins University’s School of Advanced International Studies.

Copyright: Project Syndicate