TPP, Manufacturing and the Way Forward for Inclusive Growth

June 22, 2015

Q&A with Professor Robert Lawrence on the conversation we should be having around manufacturing and the future of the US economy

The debate around the Trans-Pacific Partnership (TPP) has been called “by turns obscure and overheated.” Among the many complex questions the 12-nation deal has surfaced, one stands out. And it is a fundamental question related to inclusive growth.

How does international trade impact manufacturing?

We sat down with Robert Lawrence, one of our Senior Fellows and Professor of International Trade and Investment at Harvard, to explore this topic and discuss findings from his forthcoming research paper “US Manufacturing and Inclusive Growth.”

Q: There seems to be popular idea that offshoring or international competition is a primary driver of the decline in manufacturing in the United States since the 1980s. How accurate would you say this is?

A: Well, I’d say there is some role, which trade in general and offshoring in particular has played. But its role is vastly exaggerated relative to other forces that are in operation.

Particularly powerful is technological change, which has been very rapid in the manufacturing sector as compared with other sectors of the economy. This has resulted in the prices of goods falling very rapidly, in contrast to the price of services. It also means we can produce goods with fewer inputs—capital and labor. In fact, the story of what happened to goods and the producers of goods is very much a replay of what happened to farmers in the production of food. If we go back, 50, 100 years, most workers were on farms. Productivity increased on farms, but the demand for food didn’t—and the result was we needed fewer and fewer farmers. The same has happened in all industrial countries when it comes to manufactured goods.

 

Q: You note in your research that, historically, manufacturing has played a vital role in economic inclusion by providing a high number of jobs forworkers with lower levels of education. Is there any going back to the way things were?

A: I don’t think so. The kind of people who are being employed in manufacturing today more and more in the US are skilled workers, because the improvements in technology have been skill-biased. In the old days, a relatively unskilled person could get a blue-collar job, could organize themselves into a union and earn a middle-class income. That kind of person is unlikely to find a manufacturing job today or is less likely. It’s not simply the total number of jobs that’s falling—the composition of those jobs is increasingly toward skilled workers who can work with more sophisticated equipment.

 

Q: Where are the opportunities in the US economy that could continue to drive inclusive growth?

A: The fact is that the future of American trade lies in both goods and services, but higher-value services are where America enjoys a competitive advantage. What we need is an enhancement of and more open markets for the services that we provide to the rest of the world. This won’t necessarily solve our inclusion problem—the solution to inclusive growth doesn’t primarily lie with the jobs provided by trade.

One particular part of the US economy that has been incredibly depressed is construction—there’s a crying need for the US to invest in infrastructure. There’s a national consensus that our infrastructure is in terrible shape. This is an area is where we need a huge amount of investment. That can be a major driver of jobs for workers with lower levels of education. Our economy has insufficient demand and that’s discouraged investment—we need policies that stimulate demand. And that’s where I would also see things like infrastructure playing a role.

 

Q: In economies transitioning from manufacturing, what education policies can help deliver inclusive growth?

The most important challenge is raising the share of Americans with a college degree. About 30% of our workforce goes to college, and they will do relatively well once the economy reaches full employment. But far too many actually make it to college and then drop out. To make growth more inclusive, we need to improve opportunities to go to college and to graduate. In addition, for those unable to attend college we must improve vocational training provided by community colleges and other institutions and enhance the training of workers with the skills that employers are actually looking for by incentivizing firms to provide more on-the-job training.

 

 

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