Manufacturing Job Loss: The Consequences of Malign Neglect of the Dollar and Chinese Overcapacity

September 05, 2016


[ Robert Scott| September 02, 2016 | EPI]

Today’s Jobs Report from the BLS showed that the U.S. manufacturing sector lost 14,000 jobs in August and has now lost 57,000 jobs since January of this year.  This job loss is, in part, a consequence of the sharp rise of the dollar in 2014 and 2015, which has gained nearly 20 percent on a broad, trade-weighted basis, as shown below.  The rising dollar has reduced the cost of imports, increased the cost of U.S. exports resulting in growing trade deficits.  Growing exports support U.S. employment, but growing imports cost U.S. jobs, so the manufacturing decline was entirely predictable from the expected increase in the U.S. trade deficit, which responds to changes in the dollar with a lag of one to two years. Yet the U.S. government continues to do nothing about destructive exchange rate movements, whether they are caused by intentional currency manipulation or more recent, market-driven misalignments.

Data for the U.S. trade deficit in July were also released this morning.  The trade deficit in manufactured products (Exhibit 1S) increased 3.1 percent, year to date, relative to the same period last year, despite a decline in the overall U.S. trade deficit.  U.S. imports of petroleum products declined sharply in this period, while the trade deficit in non-petroleum goods (which is dominated by trade in manufactures) increased sharply. The single largest cause of the growing manufacturing trade deficit is malign neglect of currency manipulation over the past 20 years by the U.S. government.

China, which has been the most important currency manipulator over the past two decades, was responsible for nearly two thirds (61.3 percent) of the U.S. trade deficit in manufactured goods in 2015.  The trade deficit with China increased in July.  China has also distorted trade by generating massive amounts of excess production capacity in a wide range of industries, including steel, aluminium, glass, paper and renewable energy products. China’s capacity growth has been fueled by illegal subsidies and other unfair trade practices.  A new report from Duke University explores the impacts of overcapacity in China’s steel industry.

As the U.S. prepares for G-20 prepares for its summit meeting in Hangzhou, China, it is imperative that leaders prepare to confront China about its unfair trade and the massive amount of excess capacity which is distorting global trade not just in these industries, but in sectors that use these primary commodities to produce a wide range of downstream products such as electrical appliances, machine tools, autos and auto parts.  The United States also must come to terms with its sustained failure to address the currency manipulation, and more recently developed problems of currency misalignment, which I will address in a subsequent post.

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  • Even though China has agreed to some terms of environmental controls in the G20 meeting we are a long way from fair and balanced trade that will be required to bring our economy back. Any new trade deal must bring balance trade along with currency manipulation, intellectual property and sovereignty requirements…For a much greater perspective go see today’s Labor Day blog from PaulCraigRoberts.org to see the bigger picture of what is really happening with “Free trade”. They argue that passing the current TPP is in our national security interest but doing so would further erode our economy and national security to a much greater extent. The current TPP is a no go, no gain big time looser for workers and will give away more strength and security of our economy and national security if we cannot make anything here.
  • Anything that can be manufactured, can and will be manufactured in China at one-third to one-tenth the cost of production in the U.S. This is because of China’s dirt-cheap wages and lack of concern for human rights, worker safety or the environment.

    Any service that doesn’t involve personal contact with the customer, can and will be done in India, at one-third to one-tenth the cost in the U.S.

    As the minimum wage approaches $15, more and more low end jobs will be automated, including fast food, hotel room service, package delivery and parking lot security.

    The elites will not care until we begin to import H-1B workers to replace journalists, academics and politicians.