Order Code RL32179
CRS Report for Congress
Received through the CRS Web
Manufacturing Output, Productivity and
Employment: Implications for U.S. Policy
Updated January 29, 2004
Stephen Cooney, Coordinator
Industry Analyst
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress
Authors:
Stephen Cooney
Industry Analyst
Bernard A. Gelb
Industry Specialist
Robert Pirog
Analyst in Energy Economics and Policy
M. Angeles Villarreal
Industry Analyst
Resources, Science, and Industry Division
Manufacturing Output, Productivity and Employment:
Implications for U.S. Policy
Summary
More than two years after the U.S. economy emerged from a relatively shallow
recession in 2001, not enough new jobs have yet been created elsewhere in the
economy to offset the loss in manufacturing jobs. Nevertheless, U.S. real output in
manufacturing as of mid-2003 stood almost 30% higher than after the recession of
1991, even with 2.5 million fewer manufacturing employees. Members of Congress
are increasingly concerned as to how these developments affect manufacturing
employment in their states and districts.
Employment in manufacturing has declined as a share of overall employment
since 1960 at about the same rate of decline as the current-dollar share of GDP
accounted for by manufacturing output. Both measures have fallen from 30% to less
than 15%. Only about 15 million people are employed in manufacturing today. The
all-time peak was more than 19 million in 1979, and each successive cyclical
economic peak since then has seen fewer persons so employed. But measured on a
real basis, manufacturing output kept pace with total output in other sectors, despite
its shrinking share of employment. The explanation seems to lie in rising labor
productivity, which grew 50% more quickly for manufacturing than for the total
economy between 1960 and 2000.
These overall trends in manufacturing mask highly divergent performances
among different sectors. Analysis of performance in output and productivity among
sectors indicates that they do not tend to cluster around overall average levels of
performance. The CRS report examines in more detail three specific manufacturing
sectors: information technology industries, which have been high-growth areas of the
economy and internationally competitive; the automotive sector, which has been
affected by high levels of import penetration and is divided between the “Big Three”
U.S. manufacturers and “transplants;” and, textiles and apparel, which are facing a
high level of import competition and have experienced large numbers of job losses.
Globalization, meaning the increased internationalization of markets, inputs and
investment, has had a major impact on U.S. manufacturing. Since 1980, the U.S.
trade balance in manufactured goods has gone from a surplus to a deficit of nearly
$500 billion. The deficit is concentrated in consumer and automotive products, with
capital goods maintaining a small surplus as of 2002. But while foreign outsourcing
has become a major issue, the report notes evidence that nearly all major industrial
countries, including China, have lost manufacturing jobs since 1995. Changes in the
dollar exchange rate and U.S. international trade agreements may have also affected
domestic manufacturing.
The report concludes by examining various approaches to industrial and
industrial competitiveness policies, including the recommendations made in the
January 2004 Commerce Department report, Manufacturing in America. This CRS
report will not be updated.
Contents
Overview of Manufacturing in the U.S. Economy . . . . . . . . . . . . . . . . . . . . . . . . 1
Employment Trends in Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Manufacturing Output and the U.S. Economy . . . . . . . . . . . . . . . . . . . . . . . . 4
Productivity and Manufacturing Output . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Performance Varies Widely by Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Output Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1960 to 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1990 to 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Productivity Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1960 to 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1990 to 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Employment Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1960 to 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1990 to 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Performance of Selected Major Industrial Sectors . . . . . . . . . . . . . . . . . . . . . . . . 17
Information Technology Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Decline in Information Technology Industries . . . . . . . . . . . . . . . . . . 18
Semiconductors Bolster U.S. International IT Competitiveness . . . . . 19
IT Manufacturing Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Automobiles and Light Trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Production Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Employment Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Textiles and Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
The Economics of Textile and Apparel Production . . . . . . . . . . . . . . . 30
U.S. Textile and Apparel Production, Trade, and Employment . . . . . 31
Textile Trade Policy and Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 32
Globalization: Impact on U.S. Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
The Manufactures Trade Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Manufactured Imports and Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Foreign Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
The Dollar Exchange Rate and U.S. Manufacturing . . . . . . . . . . . . . . . . . . 40
Market-Based Exchange Rate Systems . . . . . . . . . . . . . . . . . . . . . . . . 40
The Dollar, the Trade Balance and Employment in Manufacturing . . 42
Asian Economies and the Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
The Impact of U.S. Trade Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Effects of NAFTA on US. Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
China’s Accession to the WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Industrial Policy and Industrial Competitiveness Policy . . . . . . . . . . . . . . . . . . . 55
Planning in Market Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Industrial Competitiveness Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Conclusion and Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Appendix: Change in Industrial Classification System . . . . . . . . . . . . . . . . . . . 65
List of Figures*
Figure 1. Manufacturing Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Figure 2. Manufacturing Share of U.S. GDP and Employment . . . . . . . . . . . . . . . 5
Figure 3. Real GDP and Manufacturing Output Growth . . . . . . . . . . . . . . . . . . . . 6
Figure 4. Manufacturing Employment, Output and Labor Productivity . . . . . . . . 9
Figure 5. U.S. Information Technology Market Change . . . . . . . . . . . . . . . . . . . 19
Figure 6. Total U.S. Automobile and Light Truck Production . . . . . . . . . . . . . . 26
Figure 7. Employment in Motor Vehicle and Equipment Industry . . . . . . . . . . . 28
Figure 8. U.S. Manufactured Exports and Imports . . . . . . . . . . . . . . . . . . . . . . . 35
Figure 9. U.S. Trade Balances by “End-Use” Sectors . . . . . . . . . . . . . . . . . . . . . 37
Figure 10. Exchange Value of the U.S. Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . 42
List of Tables
Table 1. Trends in Output, Labor Productivity, and Employment
in Manufacturing Industries: 1960-1990, 1990-2000 . . . . . . . . . . . . . . . . . 14
Table 2. U.S. Trade in Information Technology Products . . . . . . . . . . . . . . . . . 22
Table 3. Distribution of U.S. Motor Vehicle Production . . . . . . . . . . . . . . . . . . . 27
Table 4. Output, Productivity, and Employment
in U.S. Textile and Apparel Manufacturing Industries . . . . . . . . . . . . . . . . 31
Table 5. U.S. Trade in the Automotive Industry, 1993 -2003 . . . . . . . . . . . . . . 52
*John Williamson, Technical Information Specialist in the CRS Resources, Science
and Industry Division, assisted in producing the figures and tables for this report.
Manufacturing Output, Productivity and
Employment: Implications for U.S. Policy
Overview of Manufacturing in the U.S. Economy1
Members of Congress have become increasingly concerned about a perceived
decline in U.S. manufacturing, particularly as it may affect employment levels in
their states or districts. Nearly two years after the economy emerged from a relatively
shallow recession in 2001, not enough new jobs were created elsewhere in the
economy to offset a continuing loss in manufacturing jobs. And even as the recovery
progresses, many fear that new non-manufacturing jobs will not have the same
relatively high levels of wages and benefits traditionally associated with
manufacturing. By contrast, though it has declined since 2000, the level of real
(inflation-adjusted) U.S. manufacturing output as of mid-2003 stood almost 30%
higher than after the recession of 1991, with about 2.5 million fewer manufacturing
employees. It is more than three times U.S. real manufacturing output in 1960, when
a comparable number of people were employed in manufacturing.2
Employment Trends in Manufacturing
Figure 1 shows that, as compiled by the Department of Labor’s Bureau of Labor
Statistics (BLS), the number of manufacturing employees in the United States in
2002 was about the same as it was in 1960. The total is about 15 million, which is
also about the same as in the early 1950s, during the Korean War boom. But, of
course, the U.S. economy and population are now much larger, so that a far smaller
share of the workforce is directly employed in manufacturing. The level of
manufacturing employment has tended to move up and down with the business cycle,
but with successively lower “peaks”after the three recessionary periods of the 1980s
and 1990s (“recessionary years,” defined here as real growth of 1.0% or less in gross
domestic product, are marked in the figure). Thus, the secular trend in manufacturing
employment has been down since 1979, when 19.4 million persons were so
employed in the United States, calculated on an annual basis. The number fell by 2.4
million over the next three years with the impact of the “double-dip” recession in
1980-82, and recovered to its next cyclical peak of 18 million jobs in 1989.
Following the recession of 1990-91, the next peak employment year was 17.7 million
in 1998, after which manufacturing employment began to fall, well in advance of the
2001 recession.
1This section was written by Stephen Cooney.
2U.S. Dept. of Labor. Bureau of Labor Statistics (hereafter BLS). “National Employment,
Hours and Earnings” and “Output: Manufacturing” series (data may be subject to revision).
CRS-2
The August 2003 manufacturing employment level of 14.6 million persons was
3 million lower than the 1998 peak. It was also 1.25 million lower than when the
latest recession is calculated to have ended in November 2001. Thus, manufacturing
more than accounts for the entire net total nonfarm job loss of 1.1 million since then.
Figure 1. Manufacturing Employment
However, both the fall in manufacturing employment before the 2001 recession,
and the slowness of the recovery in both manufacturing and total employment after
a recovery began in late 2001, also suggest that we may be experiencing structural
changes in the economy. Possibly long-term structural changes to increase output per
hour of labor are overwhelming the normal employment trends related to the business
cycle.3 Recent research at the New York Federal Reserve Bank indicates that even
the “jobless recovery” after 1991 began noticeably to create jobs by 15 months after
it began. By contrast, the U.S. economy was still shedding jobs by mid-2003, almost
two years after economists decided that the recovery had begun in late 2001. Indeed,
the unprecedented slowness of the employment recovery in this case caused a long
delay in the decision of National Bureau of Economic Research, the unofficial arbiter
for declaring when recessions begin and end, to determine that November 2001
3This concept is explored in Federal Reserve Bank of New York. Erica L. Groshen and
Simon Potter, “Has Structural Change Contributed to a Jobless Recovery?” Current Issues
in Economics and Finance, IX:8 (August 2003), which provides the data and analysis for
the following comments. For a more general analysis of employment decline and the slow
recovery in employment from the 2001 recession, see: CRS Report RL32047, The “Jobless
Recovery” from the 2001 Recession: A Comparison to Earlier Recoveries and Possible
Explanations, by Marc Labonte and Linda Levine; and, CRS Report RL30799, Corporate
Downsizing and Other Mass Layoffs, by Linda Levine.
CRS-3
marked the definitive beginning of a recovery. The Fed researchers also noted that
layoffs are now increasingly permanent, not temporary, as in the past, when
employers wanted to keep experienced employees around to be rehired when the
“slowdown” in orders picked up again. They noted some industries closely
associated with high technology (such as electronic equipment) or considered high
fliers in the 1990s (communications, and securities and commodity brokers) are
downsizing post-2001 at a faster rate than the general cyclical trend, suggesting a
structural shift and permanent downsizing.4
Employer forecasts and actions, as reported in Business Week, predicted a strong
recovery ahead in the U.S. labor market. The article also stated that the slow and
uncertain start of the present recovery discouraged employers from rushing too
quickly to make permanent new hires. It forecast that an employment recovery could
start in late 2003, though it might not be robust until mid-2004, when the growth
cycle might be firmly re-established. On the other hand, even this optimistic analysis
found that “... new jobs may not be coming back soon in the hardest-hit corners of
the economy. Some companies, especially in manufacturing, are still concentrating
on cost-cutting rather than expansion.” The article cited recent large job cuts
announced at paper, apparel and information technology equipment manufacturing
companies. However, the article did also emphasize that productivity gains would
in the longer term also mean an increase in U.S. jobs, not a decrease.5
It may be that, as recently argued by Federal Reserve Board Chairman Alan
Greenspan, “the U.S. economy has been gradually moving toward an economy based
on ‘conceptual’ assets, such as ideas protected as intellectual property, and away
from ‘physical’ assets, such as plants and production machinery.”6 Nevertheless,
there is an increasing perception that manufacturing employment and the
manufacturing role in the economy are under pressure, and that this may adversely
affect U.S. standards of living. For example, the Washington Post has editorialized
about “The Lost Factory Job,” while the Greensboro News & Record, in the heart of
the hard-hit textile manufacturing belt, headlined an editorial, “Saving Factory Jobs
Critical to the Economy.”7 In a more sweeping fashion, Louis Uchitelle, chief
economics correspondent of the New York Times, wrote, “Manufacturing is slowly
disappearing in the United States ... [T]he essence of a great world power is its edge
in producing not services but manufacturing products that other people want ...”8 The
National Association of Manufacturers (NAM) recently sponsored a study that
warned:
4 Ibid., esp. Chart 1.
5Business Week, “Ready to Say ‘Help Wanted’?” (September 22, 2003), pp. 36-37, which
includes quotation.
6As summarized by Brett Ferguson, “Jobs Lost Since 2001 Recession May Not Return, New
York Fed Study Says,” Daily Report for Executives, Sept. 8, 2003, p. EE-6. The idea of
“conceptualization” of the U.S. economy was first laid out by Chairman Greenspan in
“Market Economies and the Rule of Law,” remarks to a Federal Reserve Bank of Atlanta
conference (Sea Island, GA), April 4, 2003.
7Washington Post, September 1, 2003; Greensboro News & Record; September 3, 2003.
8New York Times, August 17, 2003.
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If the U.S. manufacturing base continues to shrink at its present rate and [its]
critical mass is lost, the manufacturing innovation process will shift to other
global centers. Once that happens, a decline in U.S. living standards in the future
is virtually assured.9
The report, however, emphasized that the U.S. manufacturing sector continues
to make positive and beneficial contributions to the U.S. economy, in part through:
Manufacturing productivity gains ... historically higher than those of any other
economic sector – over the past two decades, manufacturing averaged twice the
annual productivity gains of the rest of the private sector. These gains enabled
Americans to do more with less, increase our ability to compete, and facilitate
higher wages for all employees.10
This ability “to do more with less,” a sign of strength in manufacturing,
paradoxically means that fewer manufacturing employees may be needed, if overall
demand for U.S. manufactured goods, domestically and abroad, is not rising fast
enough. In a more recent commentary on U.S. manufacturing productivity, NAM’s
president, Jerry Jasinowski, is noted reflecting on this paradox:
[He] is resigned to the fact that many of the factory jobs cut will not
reappear. But he is also proud of the fact that productivity growth in
manufacturing has consistently outstripped that of the rest of the U.S.
economy, yielding great benefits to the nation overall.11
The NAM study further emphasized that the manufacturing sector has a stronger
multiplier effect than any other major sector of the economy. It cited Commerce
Department calculations released at the end of 2002, which showed that each dollar
in U.S. final demand for manufactured products required $1.43 in intermediate goods
and services, with associated employment. For natural resources products, the
additional demand was $1.22. For the output of all other sectors, each $1 of final
demand required less than $1.00 of intermediate goods and services. This ranges
from transportation, at about 90¢, to financial and business services, which generate
only 50¢ in intermediate goods and services.12
Manufacturing Output and the U.S. Economy
Does the decline in manufacturing employment indicate a general decline in
manufacturing’s relative role in the economy? Manufacturing’s share of employment
and of current dollar gross domestic product (GDP) have indeed fallen over the long
term. Figure 2 shows that manufacturing accounted for less than 15% of total
9Joel Popkin & Co. (for NAM Council of Manufacturing Associations). Securing America’s
Future: The Case for a Strong Manufacturing Base (Washington, June 2003), p. 3.
10Ibid., p. 1.
11John M. Berry, “Some Lost Jobs May Never Come Back,” Washington Post (Nov. 29,
2003), p. E2.
12Popkin, Securing America’s Future, pp. 4-10 and Chart 1, based on Commerce Department
1997 benchmark input-output tables, the latest available data.
CRS-5
employment and GDP in 2002, compared with about 30% in 1950. The Department
of Commerce study of January 2004 reports that as of mid-2003, manufacturing
accounts for “14% of U.S. GDP and 11% of total U.S. employment.”13 This decline
in manufacturing’s share is neither cyclical nor unique to the business cycle
subsequent to 2000, as Figure 2 shows.14
Figure 2. Manufacturing Share of U.S. GDP and Employment
This long term relative decline does not necessarily indicate a weakness in
manufacturing, but does reflect the sector’s faster gains in efficiency relative to those
of the rest of the economy. This has tended to make manufactured goods as a whole
13U.S. Dept. of Commerce. Manufacturing in America: A Comprehensive Strategy to
Address the Challenges to U.S. Manufacturers (January 2004), p. 14.
14The U.S. Dept. of Commerce, Bureau of Economic Analysis (BEA) issued revised
estimates of gross domestic product and related national income and product data shortly
after research for this report was completed. In its release, BEA states that “the picture of
the economy shown in the revised estimates is very similar in broad outline to the picture
shown in the previously published estimates.” For example, the average annual growth rate
of real GDP between 1992 and 2002 using the revised numbers (3.2%) is the same as that
using the previously published data; “News Release: National Income and Product Accounts
Comprehensive Revision,” Dec. 10, 2003. Revised estimates of gross product originating
by industry will not be issued for several months.
CRS-6
cheaper than goods and services produced in other sectors,15 “causing”
manufacturing’s share of current-dollar GDP to decrease noticeably.16
Figure 3. Real GDP and Manufacturing Output Growth
If we compare the growth of manufacturing output and total GDP on a real basis
(Figure 3), we find that manufacturing has performed about as well as the rest of the
economy, and better in the 1990-2000 growth cycle. A “peak-to-peak” comparison
(using the last full year before subsequent recessions) of manufacturing and GDP in
constant dollars (removing the effects of price changes but not removing quality
improvements) shows that manufacturing output grew 3.3% per year on average
15The average price for manufactured goods as whole rose 62% between 1977 and 2001,
compared with 143% for GDP as a whole, based upon implicit price deflators derived by the
BEA (www.bea.doc.gov/bea/dn2/gpo.htm).
16GDP is a measure of the total value of goods and services produced in the economy at
prevailing prices at a given point in time. The “weight” of a component of GDP thus is
based upon what purchasers actually pay for a product or group of products in the current
period, not what they might have paid in a past period. The BEA says that “current-dollar
shares of GDP provide a more accurate measure of the relative importance of components”
than shares based upon chained dollars. (Chained-dollar estimates are a variant of constant
dollar output.) See J. Steven Landefeld, Brent R. Moulton, and Cindy M. Vojtech,
“Chained-Dollar Indexes: Issues, Tips on Their Use, and Upcoming Changes,” Survey of
Current Business (Nov. 2003), pp.8-16. However, in comparing shares of GDP over time,
calculations also can be based upon a constant dollar measure of output (in which prices
essentially are held unchanged), in order to prevent understatement of production of goods
whose prices have declined absolutely or relatively, as is the case for many manufactured
products. This basis of calculating shares is used in the following paragraph and Figure 3.
CRS-7
between 1960 and 2000, versus 3.4% for GDP.17 Real manufacturing output grew
nearly as fast or faster than real GDP during three of the four economic expansions
during that period, the exception being the 1980s. In the 1990s, real output in
manufacturing increased 3.6% per year on average, whereas real GDP rose 3.2%; the
share of real GDP accounted for by manufacturing increased from 16.4% in 1990 to
17.2% in 2000.18
In 2001-2, manufacturing output in real terms fell at an average annual rate of
3.0%, while the economy as a whole grew by 1.3%, indicating much stronger real
growth over the past two years for the non-manufacturing sectors. However, this is
only a two-year period, and not measured on the same “peak to peak” basis as the
other periods in the figure. And, as the Department of Commerce report notes,
manufacturers are usually hit hardest during a recession: manufacturing output on
average has fallen by 7% against an average 2% fall in total GDP in eight recessions
since 1950. In the “relatively mild” recession of 2001, however, that study finds that
the manufacturing sector was not only hit harder than the overall economy, but has
been affected by a particularly slow recovery. It ascribes this combination of effects
to four causes:
! A “significant retrenchment in business technology following a surge in such
investment” in the 1990s. (The impact on U.S. high technology, especially
information technology manufacturing, is explored in a later section of the
present report.)
! An especially sharp drop in inventories; the Commerce Department found that
“inventory liquidation was much more severe in the 2001 recession than it was
in the 1990-1991 recession.”
! “... Uncertainty caused by the events of September 11, 2002, which depressed
investment and demand.”
! “... The extent to which slower growth at home was compounded by the
effects of slower growth abroad, particularly the dramatic drop in U.S.
manufacturing exports to our principal export markets.”19 The details and
impact of slow manufactured export growth are discussed in a later section of
the present report.
Productivity and Manufacturing Output
Real output in manufacturing kept pace with the real gains of the economy as
a whole despite a continually declining share of total employment, because of
superior labor productivity performance, as measured by the BLS series on output per
person per hour. Over the entire period 1960-2000, the average annual change in
17To compare the rates of growth, Figure 3 uses data for real GDP calculated by BEA and
for constant-dollar manufacturing output, data published and used by BLS in its
measurements of productivity change. BLS data are used for manufacturing real output,
because BEA does not have a series of constant-dollar output by industry for the years
before 1977. For further information, see “GDP by Industry” at www.doc.gov/bea.
18Figure 4 in Manufacturing in America (p. 16) shows essentially the same relationship
between real manufacturing output and the total economy between 1977 and 2000.
19These causes are listed and discussed in ibid., pp. 19-21.
CRS-8
productivity was 50% higher for manufacturing than for total nonfarm business
activity: 3.0% against 2.0%. Manufacturing labor productivity improvement in the
1970-90 period was also higher than total nonfarm business productivity, and in the
1990s, it increased to double the overall business average.
Presenting these data for the same periods as in Figure 3, there was little
difference between the two measures in the 1960s, as both improved at an annual
average of 2.9%. In the 1970s and 1980s, both rates of labor productivity
improvement slowed, although manufacturing productivity performed better.
Manufacturing productivity increased by an annual average of 2.4% in the 1970s and
2.8% in the 1980s. By contrast, the productivity performance of total nonfarm
business gained 1.9% annually in the 1970s and 1.4% in the 1980s. By the 1990s,
manufacturing output per person-hour increased twice as fast as total nonfarm
productivity, 4.0% to 2.0%.20 And even though manufacturing output has declined
by an average of 3% per year since 2000, hourly output per employee increased by
an average of 3.3% per year, a level that nearly equals the performance of all nonfarm
business. These strong productivity numbers help explain why U.S. manufacturing
has been able to maintain high levels of output with a declining employment base.21
Figure 4 summarizes the data related to manufacturing from this section. It
compares changes in manufacturing employment, real output and productivity
measures since 1960. Employment, output measured in real terms, and output per
hour all increased in the 1960s and ‘70s. However, the trends diverged significantly
starting in the 1980s, and more dramatically in the 1990s. From 1960 to 1969,
employment grew 20%, productivity by nearly 30% and the total real value of
manufacturing output by more than 50%. Despite a major recession in the middle of
the decade, employment continued to grow in the 1970s, reaching its all-time peak
in 1979, more than 25% higher than the 1960 level, while productivity was two-
thirds higher and total output more than double the level of 1960. To this point, the
gains in the three measures were synchronous, if not completely parallel.
20“Output per person-hour” or “output per hour” is the traditional measure of labor
productivity in the economy. Hereafter, this report will use the shorter term.
21Manufacturing in America on this point summarizes, “Because productivity gains in
manufacturing have outstripped the growth in demand for manufactured goods,
manufacturing employment has been falling for the past three decades;” see pp. 17-18.
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Figure 4. Manufacturing Employment, Output and Labor Productivity
But in the 1980s, employment never regained the 1979 peak, and ended the
decade only 15% higher than in 1960. Productivity and real output both continued
to grow. After the recession of 1991, manufacturing employment grew marginally
until 1998, then began falling – ending in 2002 at a lower absolute level than in 1960.
Productivity, measured as output per hour of labor, accelerated to nearly 3.5 times the
level of 1960, and continued to improve during the period of recession and slow
growth in 2001-2. The real value of total manufacturing output was also about 3.5
times the 1960 level, despite a dip in 2001. These data suggest real manufacturing
output has continued to grow substantially, driven by improved productivity, and that
the decline in output since 2000 may be primarily cyclical in nature – especially as
the productivity rate has continued to improve.
Thus far, the analysis has dealt with U.S. “manufacturing” as a single,
undifferentiated sector. But, of course, a wide range of products and processes are
covered by the term, however it may be defined. The next sections of the report will
examine divergences of performance within the manufacturing sector, and look in
more detail at selected specific industries.
Before examining these divergent trends, the report will look briefly at one more
topic that affects manufacturing across the board, unionization. Manufacturing has
traditionally been one of the most highly unionized (“organized” in labor union
terms) sectors of the U.S. economy. The decline of the share of workers in
manufacturing jobs has thus contributed to the widely noted decline of union
membership within the total workforce. By 2002, 13.2% of all wage and salary
workers in the United States were union members, the lowest share since this
CRS-10
statistical series was begun by BLS on its current basis in 1983, when the level was
20.1%. Within manufacturing, however, union membership rates have fallen even
more precipitously. It was 27.8% when the series began in 1983, and declined to
14.3% in 2002, barely more than half the earlier level – and only one point higher
than the overall average of the total workforce. Manufacturing remains one of the
more highly unionized sectors in the private sector economy, with only construction,
and transportation and public utilities ranking higher, though both have also
registered large declines over the past 20 years (by contrast, government employees
have maintained a relatively high and stable level of union representation, at just
under 40% throughout the period).22
Performance Varies Widely by Industry23
While analysis of the overall manufacturing sector in relation to the economy
as a whole is instructive, examination of trends of individual industries within the
sector can provide further insight. Different industries experienced considerable
variations in output growth, productivity gains, employment ups and downs; and
patterns of change over time. Moreover, instances of similar growth rates or patterns
may be due to different causes.
This section describes and analyzes the increases and/or decreases over two
discrete periods in output, labor productivity, and employment observed for the “two-
digit” industries that comprise the manufacturing sector under the Standard Industrial
Classification system (SIC).24 The two-digit level is the first level of disaggregation
“below” that of manufacturing as a whole, containing a diversity of “sub-industries”
in many cases. It is used in this report because BLS does not have output and
productivity data for years prior to 1987 at a more disaggregated level.
The analysis is based upon indexes of real output and output per hour developed
by BLS, and the BLS’s employment by industry data. The periods covered are 1960
to 1990 and 1990 to 2000. The earlier period begins sufficiently later than the end
of World War II so as not to be significantly affected by that war, and is long enough
to capture secular trends. The latter period includes the unusually strong economic
years of the second half of the 1990s. For reasons of comparability, the analysis is
on a “peak-to-peak” basis; 1960, 1990 and 2000 are each a final year of an economic
expansion, as measured by annual totals of real GDP.25
22BLS. “Union Members in 2002,” annual press release and table (Feb. 25, 2003), and
unpublished time series from Current Population Survey.
23This section was written by Bernard A. Gelb.
24 Although no longer used for data collection and compiling, the SIC system is used here
because output, productivity, and employment data developed by the Bureau of Labor
Statistics on the new North American Industrial Classification System are not yet available
for years preceding 1987. See the Appendix to this report for further discussion of the
change to the new system.
25CRS believes that an annual, rather than a monthly, criterion for determining business
(continued...)
CRS-11
This section of the report does not attempt to analyze trends in every individual
industry. This is partly because trends at the two-digit level are a composite of
developments in the sub-industries, which would necessitate analysis of each of the
sub-industries. Trends in information technology industries, in motor vehicle
manufacturing, and in textile and apparel manufacturing are examined in greater
detail later in this report under “Selected Major Industries.”
Output Trends
Perhaps the most striking findings of this analysis are the degrees of divergences
among rates of output growth by individual industries and between those of
individual industries and that for manufacturing as a whole. One of the notable
aspects of this is the lack of concentration around an average rate of output growth
for all manufacturing.
The disparities that will be described reflect industries’ production method(s),
places in the chain of production, access to material inputs, product mix, distance
from markets, growth of market, technology level, rate of innovation, and degree of
exposure to foreign competition. And these aspects affect and are affected by the
evolution of the economy toward a smaller proportion of goods production being
accounted for by basic materials. Because the two-digit level is fairly aggregated,
analysis with respect to these factors can be clouded by differences in production
processes, product type and product technology level among parts of an “industry.”
As indicated in the first part of this report, real output by the manufacturing
sector increased at an average annual rate of 3.1% per year between 1960 and 1990.
However, only six of the 18 two-digit manufacturing industries for which BLS has
developed indexes of output had rates of growth during this period within 20% of
that for manufacturing as a whole; five had growth rates 40% or more below that of
manufacturing as a whole; and four had growth rates 40% or more above that of
manufacturing. For the 1990-2000 period, only three industries had growth rates
within 20% of that of manufacturing as whole; ten had growth rates 40% or more
below that for total manufacturing; and two had growth rates two and a half to four
times as fast as that for manufacturing as a whole.26 These two industries are the very
large machinery manufacturing groups, which notably include information
technology and electronic products. (See Table 1 for the data underlying this
paragraph and most of the rest of this section.)
1960 to 1990. In view of the factors listed above, it is not surprising that
output by the primary metals industry grew very slowly between 1960 and 1990, as
U.S. metal ore reserves became depleted and world production of primary materials
using energy-intensive processes tended to shift overseas, partly attracted by lower
25(...continued)
cycle peaks is the appropriate one for this report, inasmuch as the analysis uses annual data.
26 Given the 1960-1990 average annual output increase of 3.1% for total manufacturing, an
industry would be within 20% if its average increase was between 2.4% (0.8 x 3.1) and
3.7% (1.2 x 3.1).
CRS-12
energy costs abroad. Output by stone, clay, and glass manufacturers increased much
faster than that by primary metals producers even though they, too, produce basic
materials using energy-intensive processes. Losses by U.S. producers of stone, clay
and glass manufactures to overseas producers probably were limited partly due to the
low average unit value of some products, combined with the difficulty of transporting
many others, and the availability of these common materials close to their markets.
This raises the cost of transportation relative to production cost and limits the
geographic size of the market. Both industries’ output grew much slower than the
all-manufacturing average.
Industries with very rapid output growth between 1960 and 1990 include rubber
and plastic products, chemicals and allied products, industrial and commercial
machinery (including computers),27 electronic and other electrical equipment, and
instruments and related products. These industries are adept at innovation: entire or
large parts of these industries employ a high level of technology and/or employ
material inputs that are easily modified and/or combined to develop new products.
And, in many cases, their products substitute easily for higher value materials. Over
the 30-year period, these industries’ output rose at average annual rates between 4.0%
and 5.8%.
Industries with growth of about the same rate as total manufacturing in the
1960-1990 period include lumber and wood products, furniture and fixtures, paper
and allied products, and printing and publishing. The markets for goods that these
industries produce are predominantly linked to general economic and income growth.
While part of the paper industry performs energy-intensive basic material processing,
most of the value added in the two-digit industry is accounted for by the entities that
“convert” – through coating, cutting, forming, etc. – raw paper and paperboard into
the wide variety of paper and paperboard products used by businesses and
households. In the case of lumber and wood products, a big part of demand growth
stemmed from rising incomes that spurred a marked increase in the size of new
homes constructed, rather than by an increase in the number of homes built.
1990 to 2000. Between 1990 and 2000, output developments for most
individual industries were markedly different than their 1960-1990 experience. One
aspect is that divergences in production growth rates among individual industries,
when compared with the average for manufacturing as a whole, were even greater in
the 1990-2000 period than between 1960 and 1990. In the later period, only three of
the 18 two-digit manufacturing industries had rates of growth within 20% of that for
manufacturing as a whole (compared with six in the earlier period).
A second aspect is the difference between the growth rates of the individual
industries in the two periods. Production increases for the two fastest growing
industries (industrial and commercial equipment, electronic and other electrical
equipment) accelerated from their already rapid increases, as computerization and
telecommunication usage by businesses and households mushroomed, helped by
27 Computers and computer equipment were classified in this two-digit industry under the
SIC. Computer components were classified under Electronic and Other Electrical
Equipment and Components
CRS-13
continuing product innovation. These industries’ average annual output growth rates
jumped from 5.1% and 5.8% to 9.0% and 14.3%, respectively. Output by the “sub-
industry” making computers and computer equipment rose at an average annual rate
of 29% between 1990 and 2000.
The slowest-growing industry in terms of output in 1960-1990 experienced
faster growth in 1990-2000, although not up to the all-manufacturing average.
Primary metals benefitted from modernization of the integrated mill portion of the
steel industry, accelerated increase in market share produced by steel minimills, and
computerization of the machine tools used by the fabricated metals industry.
Among industries that saw output growth slow in the 1990-2000 period were
paper and allied products, chemicals and allied products, and printing and publishing.
All three had been growing as fast as or faster than the all-manufacturing average.
The first two decelerated partly because imports started to make noticeable inroads
into domestic markets, in contrast with the earlier period. The third suffered from the
widespread penetration of in-house computer-enabled printing.
The 1990-2000 period also was characterized by the fact that twice as many
individual industries experienced slower output growth compared with 1960-1990
than industries that had faster output growth compared with 1960-1990. That total
manufacturing production rose faster between 1990 and 2000 than between 1960 and
1990 is because the industries with faster output growth were large enough and their
output increases were rapid enough to more than offset the slow production growth
of the other industries.
Productivity Trends
Trends in labor productivity among manufacturing industries in the two periods
covered in this report were at least as complex and diverse as the output trends,
although there was somewhat more concentration of rates of gain in the 1960-1990
period. Divergences in rates of gain in output per hour in the 1960-1990 period
among individual industries were less extensive than those for output, described
earlier. Nine of the 18 two-digit manufacturing industries had rates of increase in
output per hour within 20% of the annual average for manufacturing as a whole
(2.7% per year); four had growth rates 40% or more higher than that of
manufacturing as a whole; and two had growth rates 40% below that of
manufacturing. But the disparities were greater in the 1990-2000 period, during
which only three industries had growth rates within 20% of the all manufacturing
average (3.8% per year); eight had growth rates 40% or more below that for total
manufacturing; but two had growth rates two and a half to four times as fast as that
for manufacturing as a whole.
CRS-14
Table 1. Trends in Output, Labor Productivity, and Employment
in Manufacturing Industries: 1960-1990, 1990-2000
Output
Output
per Hour
Employment
(thousands)
Average Annual % Change
Industry
‘60-
‘90-
‘60-
‘90-
1960
1990
2000
‘90
‘00
‘90
‘00
Total manufacturing
3.1
3.6
2.7
3.8
15,438 17,695
17,263
Food & kindred products
2.2
1.8
2.5
1.5
1,790
1,661
1,687
Textile mill products
3.2
1.0
4.2
3.6
924
691
531
Apparel, other fabricated
1.8
1.6
2.4
6.6
1,233
1,036
634
textile products
Lumber & wood products
3.0
1.1
2.7
- 0.2
670
733
830
Furniture & fixtures
2.8
3.9
1.8
2.7
365
506
556
Paper & allied products
3.3
1.5
2.8
2.2
597
697
656
Printing & publishing
3.0
0.5
1.1
0.7
911
1,569
1,547
Chemicals, allied products
4.0
2.2
3.1
2.6
828
1,086
1,034
Petroleum & coal products
1.9
1.2
2.7
3.6
212
157
127
Rubber & miscellaneous
4.9
4.8
2.3
3.4
413
888
1,011
plastic products
Stone, clay, glass, concrete
1.6
1.2
1.7
1.6
572
556
579
Primary metals
0.5
1.7
1.8
2.0
1,185
756
699
Fabricated metal products
1.9
3.2
1.5
2.1
1,230
1,419
1,539
Industrial & commercial
5.1
9.0
3.9
8.9
1,496
2,095
2,121
machinery, computers1
Electronic & other
5.8
14.3
4.7
14.0
1,221
1,673
1,726
electrical equipment2
Transportation equipment
3.0
3.6
2.4
4.0
1,668
1,989
1,852
Instruments, related
5.6
2.7
4.0
4.2
632
1,006
845
products
Miscellaneous mfg.
3.3
2.4
2.3
2.1
390
375
392
1 Includes computer equipment. 2 Includes communication equipment.
Source: Data in this table were derived from the following BLS sets of data: “Major Sector
Productivity and Costs Index” series, “Major Sector Multifactor Productivity Index” series, and
“National Employment, Hours, and Earnings” series.
CRS-15
The fairly high level of aggregation at the two-digit level combined with
considerable heterogeneity in some cases makes the challenge of explaining rates of
gain in productivity and changes in those rates over time particularly great for
industries such as transportation equipment, electronic and other electric equipment,
and rubber and miscellaneous plastic products.28 For example, in addition to motor
vehicles, products of the transportation equipment industry include guided missiles
and space vehicles, travel trailers and campers, and motorcycles and bicycles, among
others. And among the products of the electronic and other electric equipment
industry are electric distribution equipment such as transformers and switch gear,
household refrigerators and freezers, and electronic components and accessories such
as semiconductors and printed circuit boards.29
1960 to 1990. Probably indicating a connection between productivity
improvement and commercial success,30 the industries with the highest rates of
increase in output per hour between 1960 and 1990 by and large are those with the
fastest output growth. These industries included chemicals and allied products,
industrial and commercial machinery, electronic and other electrical equipment, and
instruments and related products, with average annual rates of gain in productivity
of 3.1%, 3.9%, 4.7%, and 4.0%, respectively. Manufacturing as a whole had an
average annual gain of 2.7%. One of the attributes of rapid output growth is that the
need for additional production capacity presents more opportunities for the
introduction of state-of- the- art production facilities and new production processes
than in the case of less rapidly growing industries. At least parts of the industries
cited above are characterized by rapid technological innovation, which tends to create
new products faster and generates increased demand.
Correspondingly, if the above assumption about a connection between
productivity improvement and commercial success is valid, it is not surprising that
four out of the five industries with the slowest gains in productivity (furniture and
fixtures; stone, clay, and glass; primary metals, and fabricated metal products) had
slower than average rates of increase in output during the 1960-1990 period.
Industries with average rates of increase in both output per hour and production in
the 1960-1990 period were lumber and wood products, paper and allied products, and
transportation equipment. Demand for the products of these seven slow- or average-
growing industries tends to be related to general economic growth and/or population
growth. Less rapid output increase affords fewer opportunities for the introduction
of state-of-the-art production facilities and processes.
1990 to 2000. Between 1990 and 2000, productivity developments for most
individual industries were markedly different than their 1960-1990 experience –
similar to the changes in output. As noted above, divergences in output per hour
28 The same comment holds for analyses of production increases.
29 Such groupings have evolved from industrial classification concepts of several decades
ago, when the nature and range of products and production processes were considerably
different.
30 A suggestion of “connection” does not imply 100% predictability.
CRS-16
increase among industries were even greater in the 1990-2000 period than between
1960 and 1990. Also, productivity growth rates of the individual industries differed
markedly in the two periods.
In the 1990-2000 period, the rise in output per hour of the two fastest growing
industries (industrial and commercial machinery, electronic and other electrical
equipment) accelerated sharply from their already rapid 1960-1990 increases – from
3.9% and 4.7% to 8.9% and 14.0%, respectively. Productivity of the “sub-industry”
making computers and computer equipment rose at an average annual rate of 32%
between 1990 and 2000. The extraordinary gains of the above-mentioned two-digit
industries and marked improvement by several others offset the slower than average
productivity gains by nine other industries.
The “several others” were apparel, furniture, petroleum and coal products,31
rubber and miscellaneous plastic products, and transportation equipment. Eight of
the nine industries with slower gains in output per hour in the1990-2000 period than
in 1960-1990 had average annual increases of 2.5% or less. These were food and
kindred products, lumber and wood products, paper and allied products, printing and
publishing, stone-clay-glass, primary metals, fabricated metal products, and
miscellaneous manufacturing.
Employment Trends
As discussed in the section on the manufacturing sector as a whole, the trend
(though not the level) in employment in an industry to a great extent is an outcome
of changes in the industry’s production level combined with changes in labor
productivity in the industry. Given the diversity of trends in production and in labor
productivity among the two-digit industries, it is not unexpected that trends in
employment among the industries were diverse as well during the two periods
examined. Only four of the 18 two-digit manufacturing industries had percentage
changes in employment between 1960 and 1990 within 10 percentage points of the
increase for manufacturing as a whole (14.6%), whereas 11 industries had
employment percentage changes 20 points or more higher or lower than the
percentage change for manufacturing as a whole. Taking into account that 1990 to
2000 was one third as long as 1960 to 1990, the disparities appear greater in the
1990-2000 period: only two industries had percentage changes within three
percentage points of the all manufacturing average (-2.5%); and ten had changes 20
percentage points or more higher or lower than the percentage change for total
manufacturing.
1960 to 1990. Employment in the manufacturing sector as a whole increased
by about 3¼ million people between 1960 and 1990. But, as can be concluded from
the data on divergences in the previous paragraph, the gain in overall sector
employment is the net result of many increases and decreases in absolute numbers
among the individual industries. Not surprisingly, the largest absolute increases
tended to occur in large rapidly growing industries. Thus, the industrial and
commercial machinery, electronic and other electrical equipment, rubber and
31 Petroleum refining accounts for about 90% of the output of this two-digit industry.
CRS-17
miscellaneous plastic products, and instruments and related industries experienced
gains in employment of 600,000, 450,000, 475,000, and 470,000, respectively. But
two not particularly fast-growing industries, printing and publishing and
transportation equipment, registered employment increases of about 640,000 and
320,000, respectively.
Offsetting part of these large increases plus several smaller ones, were declines
in employment of varying magnitudes in seven other industries between 1960 and
1990. These include a 430,000 decrease in primary metals and a 130,000 decrease
in food and kindred products, in addition to employment decreases totaling 430,000
in the textile mill and the apparel industries (discussed later).
1990 to 2000. Given the fact that the 1960-1990 period was much longer than
the 1990-2000 period, the amounts of employment decreases and increases in
individual industries in the later period would be expected to be smaller. This was
the case. The largest decrease was that of 400,000 in apparel manufacturing, where
very rapid productivity increases (averaging 6.6% per year) and import competition
probably were factors. Drops of 160,000 were experienced both by textile mills and
by the instruments industry, and there was a 135,000 employment decrease in the
transportation equipment industry. The otherwise fast-growing instruments industry
was hit by a sharp decrease in defense spending on search and navigation equipment.
As for transportation equipment, employment losses in aircraft and parts more than
offset gains in motor vehicles and equipment, which will be discussed in a later
section. The total of the deceases in these industries was about 850,000;
miscellaneous others saw employment drop a combined 280,000. Increases of
120,000, 120,000, and 100,000 in employment in the rubber and plastics, fabricated
metals, and lumber and wood products industries, respectively, plus a number of
small increases in employment among other industries offset some of the total
decreases to yield an employment decline of about 430,000 in the manufacturing
sector as a whole.32
From examination of trends in output, labor productivity, and employment of
individual manufacturing industries, it appears that, notwithstanding their
commonalities, they differ sufficiently in many characteristics and in the markets they
serve. Therefore, they experience vastly different outcomes over the course of time.
Performance of Selected Major Industrial Sectors
Having noted a wide divergence of performance among different sectors of the
U.S. manufacturing economy, this report will now investigate three important sectors
in more detail. The three specific sectors selected are all important sectors for the
overall U.S. economy, in terms of output and employment, and epitomize the
divergence of experiences within U.S. manufacturing.
32 The employment decrease and increase figures in this discussion of employment trends
are based upon unrounded numbers for the beginning and ending years of the two periods.
CRS-18
! Information technology (including especially computers, communications
equipment and semiconductor components) was a high-growth area of the
economy in the 1990s, and has remained internationally competitive.
! The U.S. automotive sector, which has historically expanded more by
investment abroad than by exports, faced increasing pressure from imports in
the 1980s. Now many foreign-based manufacturers have located
manufacturing operations in the United States, leaving an industry notably
divided between the traditional “Big Three” (including one now foreign-
owned company) and foreign-owned “transplants.”
! Textiles and apparel are traditional U.S. industries that have been struggling
to compete against imports. They radically reduced employment in the 1990s,
despite the strong performance of the domestic economy. Now they face the
dual challenges of the economic slowdown since 2000 and the planned
elimination of the remaining U.S. trade quotas in 2005.
Information Technology Industries33
Decline in Information Technology Industries. Information technology
(IT) industries led U.S. economic growth in the 1990s, but their decline was a major
cause of recession in 2001. Since then, the IT sectors have lagged the economy,
rather than leading it, though recent signs are that it is picking up.34 From the
perspective of the industrial economy and IT businesses, the recession has hit hardest
at manufactured hardware, particularly in low levels of demand for computers and
telecommunications equipment in which semiconductors are the key component.
This section will focus particularly on trends affecting these product groups.
Figure 5 shows the strong growth especially of business investment in the two
largest product groups that are intensive users of semiconductors, computers and
communications equipment, for most of the period following the recession of the
early 1990s. The annual value of private business investment in computers and
peripherals more than doubled from $44 billion to $93 billion between 1992 and
2000, as measured in the National Income and Product Account (NIPA) tables
produced by the Department of Commerce, Bureau of Economic Affairs (BEA).
Communications equipment purchases by business increased at an even faster pace,
from $48 billion to $117 billion. Together with software, these items accounted for
about 50% of the entire increase in U.S. business investment in the 1990s. If we refer
to BEA’s inflation-corrected values, information-processing equipment and software
accounted for 68% of the total real increase in business investment between 1992 and
2000, and nearly 20% of all real U.S. growth. However, BEA cautions that the
33This subsection was written by Stephen Cooney.
34Tom Runiewicz argues that “high tech” is again leading the recovery for two reasons: the
“short life cycle for computers and related equipment” as systems ordered for Y2K are
“becoming outdated,” and corporations look at IT systems as a quick way to boost
productivity, as the economy recovers; Global Insight: Perspectives, viewed online Nov. 18,
2003.
CRS-19
inflation-corrected estimates are questionable because prices for computing power
and performance have been changing so rapidly.35
The rapid rate of growth in the capital-goods end markets for IT products
reversed sharply in 2001. As clearly shown in Figure 5, business demand for
computers and communications equipment each fell by more than 20%, or a total of
$45 billion. Consumer demand for computers, mostly PCs for home use, held up
better than business investment, falling by less than 5%, but this is a much smaller
end market, about $25 billion in 2001. Also displayed in Figure 5 is consumer
demand for video and audio equipment, a broader consumer market of about $75
billion, but less intensive in its use of semiconductors and other IT inputs; also, many
of these types of products are imported. The market for these consumer products did
not grow in 2001, but also it did not decline. In 2002, business and consumer
demand for computers stabilized in dollar value, but business investment in
communications equipment fell another 13%, from $90 billion to $78 billion.
However, business investment and consumer purchases of computers, as well as
business investment in communications equipment, turned up in early 2003,
suggesting that IT products are contributing to a stronger economic recovery.
Figure 5. U.S. Information Technology Market Change
Semiconductors Bolster U.S. International IT Competitiveness. The
IT industry is a global industry, with respect not only to sourcing but also to
35BEA. NIPA Table 5.9, published August 2002, fn. 1 states, “because of rapid changes in
relative prices, the [real] estimates for computers are especially misleading as a measure of
the contribution or relative importance of this component.”
CRS-20
standards and applications. The relative international competitiveness of U.S. IT
equipment manufacturing sectors, widely considered as “sunrise” industries, has
become an issue for the U.S. employment and manufacturing base. With slow or
unsteady growth in markets outside the United States, there has also been a negative
impact on U.S. exports, including IT products.
Semiconductors are the key IT product in which there is a U.S. comparative
advantage. The United States has recovered the overall technological and
competitive leadership position in semiconductors, which it was once in danger of
losing, in terms of dollar value of products sold by U.S. companies. U.S. companies
had lost their initial preeminence in the global market to Japanese companies by the
mid-1980s. When U.S. industry threatened a massive antidumping case against
Japanese producers, the Reagan Administration negotiated the U.S.-Japan
Semiconductor Agreement of 1986. The Japanese industry and government agreed
to accept as a target import levels of 30% from all sources, along with a monitoring
mechanism.36 A second initiative was establishment of a private-public consortium
between the federal government and U.S.-based semiconductor and manufacturing
industry producers, known as “SEMATECH” (for Semiconductor Manufacturing
Technology). In addition, macroeconomic factors favored U.S. producers. The fall
in the dollar exchange rate, as noted elsewhere in this report, helped U.S.-based
producers regain their market competitiveness, while slow domestic growth in Japan
in the 1990s held down demand in Japanese producers’ home market.
Subsequently, U.S. companies recovered overall dominance of the world
semiconductor industry. In 1988-89 Japanese manufacturers held more than 50% of
the global semiconductor market, the only time they would do so. At that point,
Japan’s companies controlled 88% of their domestic market, about 35% of the
market elsewhere in Asia and the Pacific, and more than a quarter of the U.S.
domestic market. Because of the opening of Japan’s own market, prodded by careful
monitoring of the Semiconductor Agreement in the early 1990s, Japanese companies’
share of their domestic market declined to a consistent level of about 70% in the late
1990s. U.S. companies’ share increased from 13% to 23% of the Japanese market
over the same period.37 Meanwhile, by 2001, the Japanese share of the U.S. market,
declined by half to 11%, while the U.S. companies’ share was greater than 70%.
Japanese producers share of the Asia-Pacific market outside Japan fell by half, to less
than 19%, while U.S. companies held more than 50% of that market. In Europe,
where Japanese companies never have gained a large share of the market, their role
36The history of this agreement is reviewed in CRS Report 96-486, The U.S.-Japan
Semiconductor Agreement: Should It Be Renewed? by William H. Cooper (May 30, 1996).
For an account from the perspective of a U.S. negotiator, see Clyde V. Prestowitz, Jr.,
Trading Places (New York: Basic Books, 1988), ch. 2.
37All regional figures are from Semiconductor Industry Association (SIA), World
Semiconductor Statistics, as cited in CRS Report RL31708, Semiconductors: The High-
Technology Downturn and Issues in the 108th Congress, by Stephen Cooney. These figures
are shares held by companies, counted according to their home base.
CRS-21
declined to 14%, while U.S.-based companies again had more than 50% of the
market.38
U.S. exports and world trade in IT products were encouraged further by the
Information Technology Agreement (ITA), negotiated in 1996. Most of the countries
that produce IT equipment agreed to eliminate all tariffs on such products and
components, including computers, telecommunications equipment and
semiconductors (but not consumer electronics). There were originally 43 signatory
countries, which accounted for more than 90% of all trade in IT products; the total
value of trade covered in the original agreement was more than $650 billion. For the
United States and Japan, signature of the ITA in principle involved relatively little
change, since neither country had a tariff on semiconductors, and most other
electronics tariffs were minimal. The European Union eliminated its substantial
tariffs on semiconductors and other electronic products, while China and India both
joined the agreement, after negotiating transitional “staging” periods.39 The major
trading countries not included in the ITA bloc are the nations of Latin America,
notably Brazil, Argentina and Mexico. Though U.S. chip exporters have free access
to Mexico through NAFTA, Mexico still applies tariffs to chips imported from non-
free-trade partner countries.
With rapid economic growth, renewed U.S. industry competitiveness and a more
open global trade environment, both U.S. exports and imports of most IT products
grew rapidly in the 1990s, as shown in Table 2. But domestic growth was stronger
than foreign growth, leading to U.S. imports increasing at a higher rate than exports.
This was especially the case for computer peripherals, which the United States has
always tended to import. Also, the table shows that U.S. computer exports increased
only marginally in the 1990s, an indication that the U.S. comparative advantage is in
semiconductors, the memory and logic of IT products. But the comparative
advantage in semiconductors has been so strong that even with increased global two-
way sourcing, the U.S. trade surplus in these products grew along with increased
domestic growth and trade, and at least partially offset the deficit in peripherals. As
exports grew from $16 billion to $60 billion between 1992 and 2000, the U.S. trade
position in semiconductors changed from a balanced position to a U.S. surplus of $12
billion. Moreover, the United States maintained a balanced status in trade in
communications equipment.
38It is possible that some of this market-share gain in the Asia-Pacific region was due to
increased outsourcing by U.S. companies of printed circuit board assembly operations,
relative to similar activities by Japanese companies. But the sizes of overall gains of U.S.
companies against Japanese companies in all markets make it unlikely that this is solely an
aspect of U.S. outsourcing.
39See CRS Report 98-376 E, The Information Technology Agreement (ITA): Background on
a Proposal to Expand the Scope of the Multilateral Trade Agreement, by Glennon J.
Harrison.
CRS-22
Table 2. U.S. Trade in Information Technology Products
(All figures in billions of dollars)
1992
2000
2001
2002
X
M
Bal X
M
Bal X
M
Bal
X
M
Bal
Semi-
16
16
0
60
48
12
45
30
15
42
26
16
conductors
Computers
9
5
4
11
14
-3
11
13
-2
9
16
-7
Computer
20
27
-7
44
76
-32
37
61
-24
29
59
-30
Access.
Telecom.
12
11
1
31
33
-2
28
25
3
22
23
-1
Equipment
X = exports; M = imports.
Source: Department of Commerce. Bureau of the Census, Foreign Trade Division. U.S.
International Trade in Goods and Services (FT900), “Annual Revisions” for 1993, 2001 and
2002, Exhibits 6-7 (www.census.gov/foreign-trade/Press-Release).
The bottom fell out of the global semiconductor business in 2001. Total
worldwide sales fell from more than $200 billion to about $140 billion in 2001 and
2002, though stronger growth has recently been reported.40 The surplus in
semiconductors marginally increased in 2001-2, however, even though
semiconductor exports fell to $42 billion. The picture for computers is not so
positive. After a decade of roughly balanced trade, imports of computers nearly
doubled exports in 2002: $16 billion to $9 billion. Since 2000, telecommunications
equipment trade has roughly stayed in balance, as exports and imports have fallen
proportionately.
IT Manufacturing Employment. The employment impact of these
trade and product demand developments in general mirrors that discussed earlier
regarding manufacturing employment in general. In 1990, 1.9 million people were
employed in manufacturing computer and electronic products, which includes all the
product groups discussed here, plus other electronic products such as instruments and
medical equipment. Despite the sector’s strong contribution to U.S. growth,
employment hit a plateau of about 1.7-1.8 million in the late 1990s through 2000.
Since then, the employment level has dropped dramatically, reaching an annual rate
of 1.5 million reported for 2002, and a preliminary September 2003 monthly number
of less than 1.4 million.
About one-third of the employment in this sector is in semiconductors, where
the number increased from 574,000 in 1990 to a peak of 676,000 ten years later, then
40SIA. World Semiconductor Statistics, “World Semiconductor Shipments.” For the 2003
upturn, see SIA press release, “Global Chip Sales Reach $13.42 Billion in August 2003,”
which noted that this improvement was the sixth consecutive monthly increase.
CRS-23
fell to 531,000 in 2002, and less than half a million by mid-2003. Employment rose
in communications equipment at a slower rate in the 1990s, peaking at 247,000 in
2000, but had fallen to 191,000 in 2002. Employment in manufacturing computers
in the 1990s never reached the 1990 level of 367,000; it peaked at 322,000 in 1998,
and had fallen to 249,000 by 2002 with the industry downturn. Instruments and other
electronic products recorded a major and steady loss of employment right through the
decade, from 626,000 in 1990, through the 500,000 level in 1998, to 478,000 by 2000
and 450,000 in 2002 – a nearly 30% fall in employment. Altogether, despite the
high growth in IT’s role in the U.S. economy and the robust international competitive
position of the U.S. industry, employment gains were absent or relatively modest, and
disappeared with the onset of the recession in 2001.
The emergence of China as both a large market and a major producer of
electronics could also significantly alter the conditions for technology dominance and
site selection for chip manufacturing locations. Already, the development of China
as a major market helps explain why chip sales in Asia and the Pacific (outside
Japan) increased by almost 30% in 2002, when they declined everywhere else.41 In
2000, according to SIA figures, the “Americas” region (comprising the entire
Western Hemisphere, but dominated by the U.S. market) represented the world’s
leading market region for semiconductor shipments: $64 billion, or almost a third of
the global total. By 2002, Asia-Pacific (ex-Japan), with $51 billion in shipments
accounted for more than one-third of the global total, $20 billion ahead of the
Americas. By 2006, SIA forecasts that Asia-Pacific will account for more than 40%
of semiconductor shipments, and Japan, which is already recovering due to
aggressive efforts of its companies to sell into China, is projected to move into
second place.42
One aspect of China’s rapid integration into the world economy is that Chinese
production may create permanent downward pressure on prices, because of its
virtually inexhaustible supply of low-cost labor. This phenomenon may especially
affect pricing for those electronics products and components, such as consumer
electronics and printed circuit boards, where labor cost is critical. There is also some
question as to whether China will ever be a net exporter of semiconductors,
especially the more sophisticated variety, in the foreseeable future.43
41SIA. “World Market Shares, 1991-2001,” as updated for 2002 final data (provided
courtesy of SIA). Business Week has particularly focused on the phenomenon of Chinese
development, as in “High Tech in China: Is It a Threat to Silicon Valley?” (Oct. 28, 2002)
and “Greater China” (Dec. 9, 2002). See also Electronic News, “China Gains as U.S.
Economy Struggles,”(Sept. 23, 2002).
42The latest SIA forecast is summarized in “SIA Projects Robust Growth for Semiconductor
Industry,” released Nov. 5, 2003 on its website, http://www.semichips.org. The Japanese
newspaper Mainichi Shimbun has claimed that global industry monitoring data (World
Semiconductor Trade Statistics) will show that Japan will again overtake the United States
in total semiconductor shipments in 2003; noted in Dow Jones International News, “Japan
to Top US in 2003 Chip Shipments,” (Sept. 28, 2003).
43Business Week, “How Low Can Prices Go?” (Dec. 2, 2002); Robert Samuelson, “Deflation
Out of China?” in Washington Post (Dec. 4, 2002); Dow Jones International News, “China’s
(continued...)
CRS-24
Nevertheless, an SIA executive notes that manufacturing and R&D expenditures
in his industry tend to follow market location, and believes that the booming market
development in China and elsewhere in Asia are challenging for production located
in the United States.44 There is concern, voiced by U.S. trade officials and the
industry, that China maintains a discriminatory value-added tax regime that directly
promotes domestically manufactured semiconductors against imports.45 A report
prepared for SIA maintains that China’s increasing capability as a competitor in
semiconductor manufacturing is due not to low labor costs, which may be the case
for other electronic products, but to tax policies, and other measures to promote local
production. China has moved away from reliance on state-owned companies to
liberalization of foreign investment inflows, explicit cooperation with Taiwanese-
owned companies and adoption of other aspects of Taiwan’s high technology
development model.46
Automobiles and Light Trucks47
The U.S. automotive industry is the largest in the world. In 2002, the United
States ranked first in vehicle production, with total production of 12.3 million
vehicles. Japan ranked second, with a production of 10.2 million vehicles, and
Germany third with 5.5 million vehicles. The United States has the largest national
market in the world for total vehicle sales. In 2002, the U.S. market, with sales of
16.8 million vehicles, was almost three times larger than the next largest market in
Japan.48 In the 1980s, tensions with Japan over automotive trade led to “voluntary”
Japanese export restraints negotiated by the Reagan Administration, and later
continued unilaterally by the Japanese companies. One result of these voluntary
quotas was to encourage the major Japanese companies (Honda, Toyota, Nissan) to
invest in automotive manufacturing facilities in the United States, the so-called
43(...continued)
Reliance on Chip Imports to Continue, Study Says” (July 24, 2003). See also Economist
Intelligence Unit – Business Asia. “Misincentives in China,” (October 6, 2003).
44He also clarifies that the official SIA numbers may understate the large and growing role
of semiconductor foundries, based largely in Taiwan, which produce chips for sale by other
companies. Daryl Hatano, SIA. “Fab America – Keeping U.S. Leadership in Semiconductor
Technology,” presentation May 9, 2003. Market share data from SIA, “World Market
Shares 1991-2001” and “Semiconductor Forecast Summary, 2003-2006” (June 2003).
45U.S. Trade Representative. National Trade Estimates Report on Foreign Trade Barriers
(2003), pp. 49, 53-54.
46“SIA Report Details Growth of China Chip Industry; Tax on Semiconductor Trade
Penalizes Importers, Distorts Investments,” Business Wire (Oct. 29, 2003). Details are in
China’s Emerging Semiconductor Industry, by Thomas Howell et al. of the law firm Dewey
Ballantine, for SIA (Oct. 2003), especially ch. 3.
47This subsection was written by M. Angeles Villarreal.
48Center for Automotive Research (CAR), Economic Contribution of the Automotive
Industry to the U.S. Economy - An Update, study prepared for Alliance of Automobile
Manufacturers (Fall 2003).
CRS-25
“transplants.” These have been followed by major manufacturing investments by
Daimler Benz and BMW of Germany, and by Korean manufacturers.49
The “Big Three” U.S. -based automakers, General Motors Corp. (GM), Ford
Motor Co., and Chrysler Group (now a part of DaimlerChrysler AG), together lead
the market in U.S. passenger car sales, although their share of the market has
declined to less than 50%: 48.4% of U.S. sales in 2002, down from 55% in 2000 and
51.4% in 2001. In light trucks, which include sport utility vehicles (SUVs), the
market share of Big Three sales is much higher, but it has also been in decline in
recent years. In 2002, the three U.S. automakers accounted for 76.6% of light trucks
sold in the United States, down from 79% in 2000 and 77.2% in 2001. The
remainder of cars and light trucks sold in the United States were produced by foreign-
based companies. Most of these vehicles were produced in transplant facilities.50
Production Trends. Figure 6 shows total motor vehicle production in the
United States between 1978 and 2002. In 1978, U.S. motor vehicle production was
12.8 million, but decreased to a low of 7.0 million in 1982. In the early 1990s, motor
vehicle production grew considerably, partially due to the strengthening U.S.
economy, and also to an increase in light truck production. Production of light trucks
increased from 3.7 million in 1990 to 7.1 million in 2002. In comparison, production
of cars decreased from 6.1 million in 1990 to 5.0 million in 2002. The Alliance of
Automobile Manufacturers51 gives three factors for the resilience of U.S. motor
vehicle manufacturing from 1990 to the present. First, the overall size of the U.S.
automotive market was driven by growth in personal income and the formation of
U.S. households. Second, auto manufacturers were quick to respond after the events
of September 11, 2001 by providing price incentives, which helped sustain motor
vehicle demand. Third, automakers have been very responsive to the growing
demand for light trucks and SUVs, which now comprise almost 59% of U.S. light
vehicle production. This last factor also accounts for the concomitant decline in
passenger cars, which an industry source expects to fall to 38% in 2003.52
49An early “transplant” investment by Volkswagen in New Stanton, Pennsylvania was
closed. The Daimler Benz investment in Vance, Alabama, preceded the company’s merger
with Chrysler.
50Standard & Poor’s, Industry Surveys: Autos & Auto Parts, December 26, 2002.
51The Alliance of Automobile Manufacturers is a coalition of 10 car and light truck
manufacturers, including BMW Group, DaimlerChrysler, Ford Motor Company, General
Motors, Mazda, Mitsubishi Motors, Nissan, Porsche, Toyota, and Volkswagen.
52Study prepared for the Alliance of Automobile Manufacturers, Economic Contribution of
the Automotive Industry to the U.S. Economy – An Update (Fall 2003), p. 3.
CRS-26
Figure 6. Total U.S. Automobile and Light Truck Production
The share of motor vehicles produced by transplant facilities in the United
States has increased significantly. Between 1990 and 2002, the share of cars
manufactured in the United States by U.S. manufacturers decreased from 78.3% to
63.1%, while that of foreign manufacturers increased from 21.7% to 36.9% (see
Table 3). The Big Three are still among the top four car manufacturers in the United
States, with GM ranking first. In 2002, GM produced 1.7 million cars, and was
followed by Ford, with a production of 1.1 million cars; Honda, with a production
of 641,000 cars; and the Chrysler Group, with a production of 420,000 cars. During
the first nine months of 2003, Honda and Toyota each produced more cars in the
United States than did the Chrysler Group of DaimlerChrysler (Honda: 465,000;
Toyota: 339,000; and, Chrysler: 296,000).53 Global Insight, the econometric
forecasting firm formerly known as DRI, estimates that U.S. passenger car
production by Toyota and Honda will significantly outpace the Chrysler Group
output through 2008, the last year of its forecast.54
In light truck and sport utility vehicle (SUV) production, foreign producers have
also markedly increased their share of total U.S. production. Between 1990 and
2002, their share of light trucks and SUVs manufactured in the United States
increased from 5% to 14%. However, the Big Three remain by far the largest
producers of light trucks, with GM ranking first. In 2002, GM produced 2.4 million
units of light trucks or SUVs, followed by Ford Motor Co., with 2.3 million units;
and the Chrysler Group, with 1.3 million units. Of the foreign manufacturers, Toyota
53Automotive News, October 13, 2003, p. 42.
54Global Insight. World Car Industry Forecast Report (September 2003), pp. 200-201.
CRS-27
ranked first, with a production of 280,848 units in 2002. Nissan, Honda, and the
GM-Toyota joint venture New United Motor Manufacturing, Inc. (NUMMI) each
produced more than 100,000 units.
Table 3. Distribution of U.S. Motor Vehicle Production
Car Production
Light Truck/SUV Production
1990
2002
1990
2002
Units
Share
Units
Share
Units
Share
Units
Share
(Mils.)
(%)
(Mils.)
(%)
(Mils.)
(%)
(Mils.)
(%)
GM
2.65
43.6
1.67
33.3
1.47
41.3
2.42
34.2
Ford
1.38
22.7
1.07
21.4
1.39
39.0
2.34
33.1
Chrysler1
0.73
12.0
0.42
8.4
0.53
14.8
1.33
18.8
Total Big
4.76
78.3
3.17
63.1
3.38
95.1
6.09
86.1
Three
Foreign-
1.32
21.7
1.85
36.9
0.17
4.9
0.98
13.9
Based Mfrs.
Total U.S.
6.08
–
5.02
–
3.55
–
7.07
–
Production
1Chrysler Corp. prior to 1999, now Chrysler Group of DaimlerChrysler.
Source: Ward’s Automotive Yearbook, 2003.
Employment Trends. Figure 7 shows employment in the motor vehicles and
equipment industry from 1978 to 2002, based on BLS data. Unlike the general
patterns of employment in manufacturing, peak employment in the auto industry,
defined broadly, occurred in 1999, while that in manufacturing occurred in 1979. In
1978, the total number of employees in the auto industry was just over one million.
In 1980, the number of jobs in the auto industry decreased considerably due to the
1980 recession. However, during most of the 1990s, employment in the auto sector
increased consistently and reached a peak of more than one million jobs in 1999.
Since then, employment dropped to 911,000 in 2002.
CRS-28
Figure 7. Employment in Motor Vehicle and Equipment Industry
In terms of indirect employment related to automotive manufacturing, the
number of jobs is much larger. However, the majority of jobs indirectly related to
the auto industry are not directly tied to manufacturing. The 2003 study by the
Center for Automotive Research cited above found that while the automobile
industry continues to be the largest U.S. manufacturing industry, directly accounting
for 1.2 million jobs by its estimate, the majority of jobs related to the industry are in
supplier and related industries - such as dealerships, auto repair and maintenance,
plastics, and rubber, trucking, etc. - and not in direct manufacturing. The study
estimates that employment currently associated with total automotive industry
activity in the United States is about 3.5 million jobs, and 6.6 million when all spin-
off effects are included. The compensation that is directly attributable to the industry
is estimated to be about $152 billion.55 The study estimates that about four in ten
indirect jobs generated by the auto industry are in manufacturing, and most of them
are in durable goods.56
The overall direction of motor industry employment may also be affected by the
new industry collective bargaining agreement. After months of negotiation, the Big
Three reached new contracts with the United Auto Workers union (UAW) in
September and October 2003. Acknowledging that U.S. automakers were facing
difficulties in increasing competition from foreign manufacturers, the UAW made
55Compensation as used here is defined as the total contribution of the automotive industry,
including wages and benefits, to U.S. private sector income.
56CAR study, p. 17.
CRS-29
a number of concessions to the automakers in the new contracts. Unlike the 1999
contracts, the new contracts do not ban plant closings.57 The new contracts are
expected to help the Big Three respond to increasing competition:
! GM sought to save retiree costs, especially in rapidly rising healthcare outlays,
because it has a higher ratio of retirees to current employees, and any increase
in retiree pension and healthcare costs would cost GM more than the other two
major U.S. automakers. The UAW and GM reached an agreement in which
GM would shut down three plants employing 1,500 workers, in exchange for
assurances that it would continue to choose its unionized former affiliate
Delphi for parts, as opposed to nonunion suppliers.58
! Ford sought to reduce excess capacity by shutting down five vehicle
production plants protected by the previous contract. The UAW agreement
with Ford, lets it close or sell four plants. This is expected to eliminate 4,600
manufacturing jobs through plant closures in the United States, plus a further
reduction of 3,000 salaried positions in North America, and cuts of more than
4,000 jobs in Europe. With the plant closings, Ford will meet its goal of
trimming North American production capacity by nearly one million units.59
! Chrysler wanted concessions from the union to help in vehicle assembly labor
productivity so that it would become more competitive. In exchange, the
company would enhance wages or post-retirement benefits for UAW
members. The UAW said Chrysler identified nine plants that it wanted to
close or sell, but that four will remain covered by the new agreement.
Chrysler confirmed that it would close two parts plants, eliminating 1580 jobs,
and sell three others under the ratified contract.60
The effort between auto producers and the UAW in negotiating the new
contracts is expected to help U.S. manufacturers address problems facing the
industry. One of the issues is that the U.S. market may be facing overcapacity as
foreign competitors continue to build plants in North America. The UAW agreed to
certain plant closures in exchange for a preservation of wages and benefits. Some
analysts have stated that while the new contracts offer hope for the Big Three, the
union’s concessions on plant closings may not be enough and that the industry may
need to close additional plants.61 Most transplants are not unionized. Toyota,
Nissan, Honda, BMW, and Mercedes employ about 48,000 non-union workers, with
considerably lower total benefit costs.62
57Chicago Tribune, “UAW Oks Pact with DaimlerChrysler,” September 27, 2003, p. 2.
58St. Louis Post-Dispatch, “GM Contract Would OK Closings,” Sept. 22, 2003, p. A5.
59Automotive News, “Ford Trims Capacity, Still Has Problems,” October 6, 2003, p. 8.
60Automotive News, “More Cuts for a Bloody Chrysler,” October 6, 2003, p. 6.
61International Herald Tribune, “Big 3’s Labor Deals Offer Hope But Union’s Concessions
on Plant Closings May Not Be Enough,” September 25, 2003, p. 25.
62USA Today, “Foreign Companies Cast Long Shadow on UAW Negotiations,” August 6,
(continued...)
CRS-30
Textiles and Apparel63
Steeply rising imports and steeply declining employment in U.S. textile and
apparel manufacturing64 have brought considerable attention to and concern about
these industries. Because of their importance to the U.S. economy, to certain U.S.
geographic regions, and to many U.S. trade partners, textiles and apparel have been
major issues in U.S. trade relations with a number of countries, leading to the signing
of bilateral and multilateral agreements generally restricting the quantities of textiles
and apparel traded, including the establishment of quotas.
The Economics of Textile and Apparel Production. Textile and apparel
manufacture, and international trade in those products, have been important elements
of economic activity and growth since the Industrial Revolution. Major reasons for
this are (1) textiles and apparel are basic items of consumption in all countries, and
(2) textile manufacture to some extent, and apparel manufacture in particular, are
labor-intensive, requiring relatively little fixed capital for entrepreneurs to establish
production facilities. Thus, these industries are major generators of employment.
Modest capital requirements contributed to textiles and apparel becoming major
industries at the start of the Industrial Revolution and remaining important to
developing countries now. The percentage of total manufacturing value added
accounted for by textile and apparel production among developing countries, for
example, was triple the percentage among industrialized countries in 2000.65
Lower wage rates in developing countries together with the labor-intensiveness
of apparel manufacture tend to give these countries a comparative advantage in
apparel manufacture and a locational advantage for textile manufacture. Thus, textile
and apparel manufacture is tending to shift to developing countries, with textiles and
apparel constituting large portions of their exports. Textile and apparel manufacture
(measured by constant-dollar value added) in industrialized countries declined
between 1980 and 2000, whereas textile and apparel manufacture in developing
countries increased.66 Between 1980 and 1999, textile and apparel exports of
developing economies (in nominal dollars) rose 500% while developed economies’
textile and apparel exports rose 125%. Textiles and apparel comprised 13% of
developing economies’ exports in 1999, versus 4% for developed economies.67
62(...continued)
2003, p. 1B.
63This subsection was written by Bernard A. Gelb.
64 Common usage often includes apparel and other fabricated textile products under the
general term “textiles.” For greater precision, this report uses the more specific terms, with
“textiles” generally meaning fibers and fabrics, and “apparel” meaning items of clothing
other than footwear. Exceptions are where industry production and trade data are reported.
65 United Nations, Industrial Development Organization. International Yearbook of
Industrial Statistics 2002. Vienna: 2002. p. 55.
66 United Nations. op. cit. p. 58-59.
67 United Nations. 1994 International Trade Statistics Yearbook, Vol. II. New York: 1995.
p. S-20, 76, 92; 1999 International Trade Statistics Yearbook, Vol. II. New York: 2000. p.
CRS-31
U.S. Textile and Apparel Production, Trade, and Employment.
Textile and apparel manufacturing were two very large industries when the 1960s
began; and U.S. textile and apparel manufacturing output rose respectably between
1960 and the early 1990s. Textile manufacturing production tripled between 1960
and 1994; apparel manufacturing production doubled. Since 1994, however, output
by both industries has fallen (Table 4). In contrast, total U.S. manufacturing output
nearly tripled between 1960 and 1994, and rose 20% more between 1994 and 2002,
despite the recent recession.68
Table 4. Output, Productivity, and Employment
in U.S. Textile and Apparel Manufacturing Industries
Textile Mill Products
Apparel and Other Fabricated
Textile Products
Years
Output
Productivity
Employment
Output
Productivity
Employment
(1996 = 100) (1996 = 100)
(thousands)
(1996 = 100) (1996 = 100)
(thousands)
1960
33.6
23.1
924
50.4
37.1
1,233
1973
65.7
40.6
1,010
75.5
48.5
1,438
1987
86.6
72.7
725
93.5
76.0
1,097
1994
101.5
91.2
676
100.8
90.0
974
2000
95.4
112.0
531
102.4
142.1
634
2002
85E
n.a.
432
98E
n.a.
521
E - CRS estimate based upon Federal Reserve indexes of industrial production.
n.a. - Not available.
Source: Data in this table were obtained from the following BLS sets of data – "Major Sector
Multifactor Productivity Index" series, and "National Employment, Hours, and Earnings" series.
More significant to many in the U.S. textile and apparel industries, employment
in those industries has decreased markedly in the last three decades – by 57% and
64%, respectively, between 1973 and 2002. The two industries together employed
about 950,000 in 2002, or 6% of total manufacturing employment, compared with
2.4 million, or 16% of total manufacturing employment in 1973. And the 700,000-
decline in the two industries’ employment between 1994 and 2002 equaled about
40% of the drop in total manufacturing employment.
Some of the decline in U.S. textile and apparel employment is linked to gains
in productivity, and some to increases in importation of textiles and apparel. Output
per hour in textile manufacturing more than tripled between 1960 and 1987, then rose
more than 50% between 1987 and 2000. Apparel manufacturing output per hour
S-42, 98, 114.
68 Production change data for U.S. industries used hereafter in this report are based upon
indexes of real gross output derived by BLS – designed to reflect changes in the constant-
dollar value of production – rather than in constant-dollar value added (used by the U.N.).
CRS-32
doubled in the earlier period, and nearly doubled again in the shorter later period.
Thus, gains in textile manufacturing productivity were more rapid between 1960 and
1987; and those in apparel manufacturing the most rapid more recently (Table 4).
U.S. imports of textiles in 2002 (in current dollars) ran more than three times
their 1980 level; and 2002 apparel imports were more than ten times their 1980 level.
Imports of all textiles and apparel exceeded exports by an estimated $62 billion in
2002. To a great extent, the increase in imports of apparel over the years reflects a
number of sharp increases in imports. For example, there were two such increases
in the 1960s, one in the 1970s, one in the 1980s, and one in the 1990s.
As can be seen from the import data above, U.S.-made textiles have fared less
badly with respect to trade than U.S.-made apparel. Textile production is less labor-
intensive, more easily automated, and, as a major input to apparel, can be exported
to serve as inputs to foreign-made apparel that then is exported to the United States.
The U.S. textile manufacturing industry also has been helped by requirements in
many trade agreements and trade preference programs that U.S.-made fibers and
fabrics be used to produce the apparel made abroad.
The considerable extent of U.S. textile and apparel trade with developing
countries is indicated by the following 2002 data. For imports, 4 of the top 10 fiber
and fabric import sources, 4 of the top 10 non-apparel textile product sources, and 8
of the top 10 apparel sources were developing countries. For U.S. exports, 7 of the
top 10 fiber and fabric destinations, 4 of the top 10 non-apparel product destinations,
and 7 of the top 10 apparel destinations were developing countries. Mexico was
among the top five in all the above import and export product groups; and China was
first as a textile product exporter and first as an apparel exporter to the United
States.69
Textile Trade Policy and Agreements. In attempts to resolve conflicts
between the interests of exporters and importers, the United States has signed a
number of agreements (multilateral and bilateral) over the years generally restricting
the quantities of textiles and apparel imported, including the establishment of quotas.
The international Agreement on Textiles and Clothing (ATC) provides for the
phasing out of those quotas by January 1, 2005. It places trade in textiles and apparel
under the rules governing other products, but with a provision allowing importing
countries to impose transitional safeguard mechanisms to protect against damaging
surges of imports of products not under quota and not yet integrated under World
Trade Organization (WTO) rules. Developing countries, whose exports have been
limited, consider the phase-out procedure as unfair, and are pressing for accelerated
implementation of the phase-out. They contend that the United States and other
developed countries have delayed import liberalization.
The United States has entered into several bilateral trade agreements in recent
years. Because apparel and textile mill products account for 9% of exports by China
69 The trade data used in this section are from the Dataweb database compiled by the U.S.
International Trade Commission from U.S. Departments of Commerce and Treasury data,
obtained stepwise October 2, 2003 from http://dataweb.usitc.gov/scripts/INTRO.asp.
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to the United States, the agreement with China, reached November 15, 1999,
probably is most important with respect to textiles and apparel. Among the wide
range of issues covered, it incorporated the 1997 textile and apparel agreement
between the two countries. Major elements of the 1999 agreement were (a) China,
upon accession to the WTO, will “catch up” to the ATC schedule of quota phase-outs
by 2005 for other WTO members, but the United States retains the right to impose
safeguard measures through the end of 2008, allowing continuation of some quotas
under some conditions, and (b) China will significantly lower its tariffs on a wide
range of textile and apparel products, and not impose new nontariff barriers.
U.S. textile and apparel importers praised the agreement, especially regarding
the quick ending of quotas. U.S. textile manufacturers were disappointed that the
agreement did not continue the quotas on Chinese textiles and apparel for 10 years,
a phase-out duration faced by other WTO members; and the industry trade group
expressed concern over projected U.S. job and production losses.70 U.S. labor, as
represented by the AFL-CIO, criticized the agreement as failing to protect workers’
and human rights. P.L. 106-286 created mechanisms to monitor China’s compliance,
and authorized the President to grant China permanent normal trade relations (PNTR)
status after it joined the WTO. The President granted PNTR status to China on
December 27, 2001, after it officially joined the WTO on December 11, 2001.
Imports of textiles and apparel from China subsequently rose 13% between 2001
and 2002, and increased 29% in the first seven months of 2003 over the same period
in 2002. Increases in imports of three groups of textile and apparel products from
China have been so rapid that the United States has put caps on imports from China
of some of these items, as permitted under the U.S.-China WTO accession
agreement.71 Analysis of the possible effects of China’s accession to the WTO can
be found in the section on trade agreement impacts later in this report.72
Recent bilateral trade agreements with Vietnam and Singapore also have
negative significance for U.S. textile and apparel manufacturing. The July 2000
agreement with Vietnam was followed up in December 2001 with the U.S. granting
normalized trade status to Vietnam, conditional on annual review under terms of the
Jackson-Vanik amendment.73 Such status significantly cut U.S. tariffs on most
imports from Vietnam, leading to a very large increase in Vietnamese exports of
textiles and apparel to the United States. An April 2003 agreement put quotas on 38
categories of Vietnam’s clothing exports. The December 2002 trade agreement with
70American Textile Manufacturers Institute, “Statement by Doug Allen, President,
Regarding the U.S.-China WTO Agreement,” Nov. 15, 1999. U.S. Association of Importers
of Textiles and Apparel, “Importer Association Hails U.S.-China Agreement on WTO
Accession,” Nov. 15, 1999.
71Inside US Trade, “Commerce’s CITA Approves Three China Safeguard Provisions,”
November 18, 2003.
72 For more on U.S.-China trade relations in general and textile and apparel trade in
particular, see CRS Issue Brief IB91121, China-U.S. Trade Issues.
73The Jackson-Vanik provision of the Trade Act of 1974 is found at 19 USC 2432. For
details on U.S.-Vietnam trade relations, see CRS Issue Brief IB98033, The Vietnam-U.S.
Normalization Process, by Mark E. Manyin, esp. p. 5.
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Singapore makes Singaporean exports of textiles and apparel to the United States
duty free if made from U.S. yarn or from materials further along the production chain
that originate in the United States or Singapore. A limited amount of apparel exports
from Singapore will be exempt for eight years, and tariffs on those exports will be
phased out over five years. The United States commits to more liberal rules of origin
once further liberalization of such rules is achieved in the WTO.
The U.S. Congress has made efforts to spur economic growth in poorer regions
of the world, to some extent by providing textile and apparel trade benefits. Among
the provisions of those measures, Congress has eased trade terms in stages on such
goods from Andean, Caribbean, and sub-Saharan region countries.74 The extent of
these trade benefits is constrained by concerns that growth of textile and apparel
production in the above regions has caused and could cause further difficulty for
segments of the U.S. textile and apparel industries. Thus, as noted above, many of
the trade preferences for textiles and apparel tend to require that U.S.-made fibers and
fabrics be used to produce the apparel that is made in the beneficiary countries.75
Globalization: Impact on U.S. Manufacturing
The Manufactures Trade Balance76
Today “globalization” is a well-known phenomenon, and has been for nearly a
generation. In the strictly economic sense, it means a focus on world markets as a
source of inputs and as a place to sell goods and services, and as a destination for
investment capital. In terms of direct impact on everyday lives, the world today is
more globalized, both in a broader and a deeper sense, than ever before. This can be
seen in terms of the amount of exports and imports expressed as a percent of U.S.
GDP. After two generations of protectionist policies worldwide, an international
economic depression and two world wars, imports and exports together equaled less
than 10% of U.S. GDP in 1960, and just a little more than that 10 years later. By
1980 and 1990, the level had doubled to more than 20%, and in 2000, it stood at
26%.77
74 See also Caribbean Basin Interim Trade Program: CBI/NAFTA Parity; and CRS Report
RL30790, The Andean Trade Preference Act: Background and Issues for Reauthorization.
75 For discussion and description of rules of origin in U.S. trade preference programs and
free trade agreements, see CRS Report RL31934, Textile and Apparel Rules of Origin in
International Trade.
76This subsection was written by Stephen Cooney.
77Calculated from Economic Report of the President, 2003. Table B1. These numbers are
cited only to illustrate the relative importance of exports and imports to the total economy.
U.S. exports are included in GDP and imports, that component of national consumption
sourced abroad, are subtracted. For a detailed analysis of the macroeconomic aspects of the
overall U.S. trade deficit and the deficit on the balance of payments on current account, see
CRS Report RL31032, The U.S. Trade Deficit: Causes, Consequences and Cures, by Craig
Elwell; and, CRS Report RL30534, America’s Growing Current Account Deficit: Its Cause
and What It Means for the Economy, by Marc Labonte and Gail E. Makinen.
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Figure 8. U.S. Manufactured Exports and Imports
Manufactured Imports and Exports. Figure 8 illustrates the relative
growth of manufactured exports and imports since 1980. The overwhelming
majority of U.S. trade in physical goods is in manufactured goods, which therefore
account for most of the changes in the overall U.S. trade balance in physical goods.
In 2002, for example, manufactures accounted for 79% of all U.S. goods exports (by
comparison, agricultural commodities accounted for less than 8%); manufactures also
accounted for nearly 84% of all U.S. goods imports (by comparison, mineral fuels
accounted for just under 10%).78
In the early 1980s, as the figure shows, the United States still had a trade surplus
in manufactured goods, but that surplus was declining. The U.S. economy grew
strongly after a recessionary period in 1980-82, the value of the dollar was rising,
discouraging U.S. exports, and foreign markets, notably in Europe, were struggling
with the effects of “stagflation.” By 1983, the surplus turned into a $24 billion
deficit. The deficit rose to more than $100 billion in 1986-88. It then declined to
less than $100 billion for five years from 1989 through 1993, probably due to a
reversal of exchange rate and growth trends, as well as the effect of a recession and
a slow recovery in the early 1990s on U.S. domestic demand. Exports grew 8.8% per
year during this period, and increased by $133 billion; imports of manufactures grew
by $119 billion, or only 5.8% annually. Both export and import growth accelerated
in 1993-7: manufactured exports grew by more than $200 billion, or more than 11%
per year; but imports grew by $250 billion, or more than 13% annually.
78U.S. Dept. of Commerce. Bureau of the Census. Foreign Trade Division. FT900: U.S.
International Trade in Goods and Services, 2002 Annual Report, Exhibit 14.
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Manufactured exports stopped growing after 1997. In 2002 and partial-year
2003 data, exports were a little more than $600 billion, not substantially higher than
the 1997 level of $593 billion. During the intervening years, there was only one
strong export growth year: 2000 with a 12.5% rise to nearly $700 billion, but then
exports fell by more than $50 billion the next year.79 By contrast, manufactured
imports continued to increase strongly, by nearly $300 billion, to more than $1
trillion in 2000. Manufactured imports then fell because of slower U.S. growth, but
not as fast as exports. The manufactures trade deficit has been more than $300 billion
in each year since 1999, and could reach $400 billion in 2003, an amount greater than
one-quarter of estimated U.S. manufacturing output of $1.4 trillion.
Figure 9 illustrates the U.S. industrial goods trade balances according to “end-
use” sectors. This is a different data set, so the data include some non-manufactured
products, especially in industrial supplies and materials (though petroleum products
have been subtracted in this calculation). This figure is not meant to imply that U.S.
trade should be balanced in all sectors, but rather to indicate relative U.S.
comparative advantage, and where the deficit has increased most sharply.
The figure shows that out of a total U.S. trade deficit of $482 billion in 2002,
almost $350 billion was due to the deficits in consumer goods and automotive
vehicles – and these deficits showed the strongest increases during the high-growth
1990s (a $240 billion combined negative change since 1992). While many complain
at the large quantities of imported consumer goods in U.S. retail stores, the fact is
that the United States has long had a deficit in manufactured consumer goods. On the
other hand, despite the rapid growth in transplant automotive manufacturing
establishments discussed earlier, the automotive trade deficit increased by $80 billion
between 1992 and 2002.
Capital goods – products used for the production of other goods and services –
long the sector where the U.S. has had its greatest comparative advantage – remained
in surplus by $7 billion in 2002, falling from $41 billion earlier (the balance was
slightly negative through the first nine months of 2003). Non-oil industrial supplies
and materials, used as inputs by U.S. manufacturers, showed a relatively smaller
change in the 1990s, from a 1992 surplus of $15 billion to a deficit of about $21
billion in 2002.
79Michael Mandel calculates that if total U.S. exports had grown by 18%after the 2001
recession, as they did in the equivalent time period after the recession in 1990-91, instead
of the actual levels, total U.S. exports today would be $170 billion higher than they are and
would have created a conservatively estimated 850,000 additional U.S. jobs; in “So Where
Are the Jobs?: They’re on the Way ... Or Maybe Not,” Business Week (January 26, 2004),
pp. 39-40.
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Figure 9. U.S. Trade Balances by “End-Use” Sectors
Foreign Outsourcing. In view of the negative movement in the U.S.
trade balance and the loss of domestic manufacturing jobs, foreign outsourcing of
jobs has become a major issue. The loss of jobs in product groups where the United
States may have lost much of its comparative advantage has long been understood,
though not happily accepted (see the textiles and apparel discussion earlier, for
example). But alarm has increased over apparent losses of jobs related to high-
technology industries and services, for example, software programming and call
centers. Two private research firms have reportedly estimated that large numbers of
such service-sector jobs will move overseas: Forrester Research reportedly estimated
that 400,000 such job displacements would occur in 2003, and Gartner Dataquest
estimated that 500,000 IT vendor and services jobs would go by the end of 2004.80
According to a report in the Toronto Globe and Mail on a McKinsey Global Institute
report, Ireland was the largest country for U.S. IT and business-process outsourcing
in 2002 ($8.3 billion), followed closely by India at $7.7 billion. Canada ranked a
distant third with $3.7 billion.81
Official estimates of overseas investment by U.S. multinational companies show
some increase in overseas commitments, although the official data may lag behind
such forecasts and press speculation. For example, the number of persons directly
80Steven Greenhouse, “IBM Explores Shift of Some Jobs Overseas,”New York Times, July
22, 2003, p. C1; Eric Auchard, “One in Ten Technology Jobs May Move Overseas,”Chicago
Tribune, August 3, 2003, p. 5.
81David Ticoll, “Wise Up about Offshore Outsourcing,” Toronto Globe and Mail, October
16, 2003.
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employed at all foreign affiliates in which U.S. parents have a direct investment
interest (greater than 10%) was stable at around 6.6 million persons between 1982
and 1993, according to Commerce Department data. That number had increased
more than 40%, or almost 3 million employees, by 2000, the latest date for which
such data are available. But the employment of U.S. parents, by this measure,
remained firmly rooted in the United States. Employment of foreign affiliates rose
only from 26% of all employment in 1982, to 27.5% in 1993, to 29.3% by 2000.
Furthermore, this number does not include overseas outsourcing by “contract
manufacturers.” Such firms as Solectron and Flextronics have become important
manufacturers in the electronic businesses, while the 1990s also saw the rise of
semiconductor manufacturing “foundries,” such as Taiwan Semiconductor
Manufacturing Company and United Microelectronics Corporation, and Singapore-
based Chartered Semiconductor. These are all now multibillion-dollar enterprises.82
However, an examination of capital outflow numbers (equity increases and
reinvested earnings) does not appear to indicate any recent surge of direct investment
by U.S. manufacturers in Asia, in comparison with other regions. Total U.S. direct
investment capital outflow in 2002 was $120 billion, little more than half the level
of $209 billion in 1999. Investment in manufacturing affiliates was also down, from
$40 billion to $30 billion. This was especially true in computers, electronics and
components, where overseas investment by U.S. parents declined from $11 billion
in 1999 and $17 billion in 2000, to about $1 billion in 2002, although this may well
reflect that domestic IT manufacturers had a low level of earnings to invest
anywhere. Overall, between 1999 and 2002, U.S. companies’ cumulative direct
investment in manufacturing affiliates increased $37 billion in Europe (22%), $20
billion in Canada (40%), and $15 billion in Asia and the Pacific (36%), while falling
$5.5 billion (11%) in Latin America.83
Nevertheless, U.S. executives have stressed the attractiveness of Asian business
locations for future investment and growth. Intel CEO Craig Barrett, recently
opening a new semiconductor test facility in Sichuan, China, said:
Most countries other than the [United States] provide incentives for the future ...
People in these countries are fully capable of doing any engineering job a U.S.
employee can do. New talent in these workforces is going to have a massive
effect on where jobs are created ... Look at how Taiwan affected the global
electronics industry, and then imagine that on ten times the scale.84
In a later interview, when he indicated that Intel is unlikely to increase hiring or
to expand plant capacity in California, Barrett said that global competition and the
maturing U.S. electronics market now mean that 70% of Intel’s markets lie outside
82On the reviving boom in chip foundries, see Business Week, “A Chip Boom? In Asia, at
Least,” (Nov. 3, 2003).
83BEA “U.S. Direct Investment Abroad,” Survey of Current Business (Sept. 2003), by
Jeffrey H. Lowe, Tables 5 and 11.
84Quoted from Xinhua Financial Network. “Global Job Shifts Toward Asia Threaten Future
US Employment – Intel CEO” (Aug. 28, 2003).
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the United States; “Our investments are really following our customers,” he
concluded.85
But whether the location of new manufacturing jobs is driven by lower
production costs or the need to be close to the customer base, it is clear that the recent
U.S. experience is not unique: manufacturing employment is declining almost
everywhere as productivity improves. Moreover, it is especially occurring in China,
where the inefficient state-owned economic sector is being opened to local and
international competition, resulting in large-scale job losses. According to a report
by Alliance Capital economist Joseph G. Carson, manufacturing employment in
China between 1995 and 2002 fell from 98 million to 83 million, a loss of 15 million
jobs. Thus, China lost more manufacturing jobs during the past seven years than the
total number of manufacturing jobs left in the United States (though China has added
2-3 million manufacturing jobs since a trough in 2000-1).86 Over the same period,
the other largest manufacturing nations lost a total of 7 million manufacturing jobs.
Of the 20 largest economies reported in Carson’s analysis, only five showed any
gains in manufacturing employment (Canada, Mexico, Spain, Taiwan and the
Philippines). But their gains were only marginal and hardly offset the net total loss
of 22 million manufacturing jobs among all major industrial countries, including
China, during the period – a decline of 11% in employment, while output increased
30%.87
The Commerce Department’s report, Manufacturing in America, indicates that
the trend in foreign outsourcing, such as it is, may be one aspect of “structural
changes shaping the competitive environment” of U.S. manufacturing companies.
It ascribes these changes to three fundamental trends. First, there has been a
technological revolution in manufacturing resulting from improvements in
computing, communications and distribution. Moreover, this revolution has been
global, and not just restricted to U.S.-based companies. The Commerce report notes,
for example, that in the 1960s, 60-70% of global research and development activities
occurred in the United States and were largely funded by the federal government.
Now the U.S. private sector finances twice the level of R&D of that financed by the
government, and the U.S. share of the global total is only 30%.
Secondly, as mentioned earlier in the present report, successive reductions of
tariff and non-tariff barriers through international trade negotiations have
substantially increased the role and impact of international trade in the U.S. economy.
And, thirdly, the end of the Cold War and important policy changes in many major
countries have led to an emergence of new participants in the international economy,
notably China, as indicated just above, and countries formerly comprising the Soviet
Union and its bloc in eastern Europe – participants which are also international
competitors. In such an environment, the Commerce Department argues, competition
85Reuters. “Intel CEO Says California Has Lost Its Luster,” (October 21, 2003).
86Some would observe that comparing the situation of state-owned enterprises in China,
many of which were never viable on a market basis, to the situation of American
manufacturers is a major simplification.
87Joseph G. Carson. “AllianceBernstein US Weekly Economic Update,” October 10, 2003.
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is increasingly not horizontal competition between individual companies, but rather
competition between different vertically integrated supply chains.88
The Dollar Exchange Rate and U.S. Manufacturing89
With the slowdown in the U.S. manufacturing growth at the end of the 1990s,
the impact of a relatively high value of the dollar in foreign exchange again became
a major concern for many. This section of the paper examines the case for a causal
linkage between exchange rates and manufacturing employment. While, in principle,
exchange rate variations could affect both a nation’s imports and exports, and hence,
employment, the empirical case is mixed. First, neither in the short or the long term
are exchange rates the singular influence on manufacturing employment. Swings in
the business cycle account for significant short term employment variation, while in
the long term the effects of productivity growth exert an important influence.
Second, data from 1980 to 2002 show periods where the variation manufacturing
employment is consistently predicted by changes in the exchange rate, but also
periods where the two move in an inconsistent manner. Finally, expert opinion
reflects the mixed state of empirical evidence. While some observers believe
revaluation of the Chinese yuan, a currency whose value is fixed in terms of the
dollar, would provide a significant boost to manufacturing employment in the U.S.
by expanding our exports and reducing our imports, others believe the effect would
be minimal, merely increasing our imports from other countries, with little effect on
employment.
Market-Based Exchange Rate Systems. With the slowdown in U.S.
manufacturing growth at the end of the 1990s, the impact of a relatively high
exchange rate of the dollar again became a major concern for many. Since the early
1970s, the value of the U.S. dollar in exchange for other currencies has been
determined through a system of flexible exchange rates. In this system, governments
typically do not directly control the value of their currencies as a matter of policy, but
let the market forces of supply and demand determine the value. In principle, the
value of a nation’s currency is directly related to the balance of trade, as well as flows
of international capital into and out of the country. By affecting relative costs, and
hence sales, of both imported and exported goods, the exchange rate may also affect
both sectoral and general macroeconomic activity. As a result, macroeconomic
variables such as employment, inflation, and the rate of economic growth may all be
influenced by the exchange rate.90
The degree to which exchange rate variations affect sectors of the economy, like
manufacturing, or even the overall economy, depends on how open that sector, or
economy, is to world markets. The openness of an economy depends on the level of
88Manufacturing in America, pp. 22-30.
89This subsection was written by Robert Pirog.
90The U.S. dollar plays a key role in the world monetary system, because it serves as an
international means of payment, as well as being the standard to which nations peg their
exchange rate, if they are not market-determined. Since the dollar serves these functions,
a variety of benefits, costs and uncertainties are created.
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tariffs, capital controls, and the degree to which competitive products are produced
in other nations.
Researchers measure the degree of openness by adding an industry’s exports and
imports, and expressing the sum as a proportion of the industry’s domestic sales,
exports and imports. By this measure, the openness of the U.S. manufacturing sector
has grown sharply since the early 1970s. The growth rate of openness in U.S.
manufacturing has averaged over 5% per year since 1972. The growth has not been
uniform, however. Industries that were the most open to the world economy in 1972
have shown the highest growth of openness. This heterogeneous pattern implies that
some sectors of the manufacturing industry are experiencing substantial international
competition, while other sectors might remain relatively isolated.91
On a bilateral basis internationally traded currencies bear a symmetrical
relationship to one another. When one currency is appreciating, this is equivalent to
saying the other currency is weakening, and vice versa. For example, if the dollar is
being compared to the euro, a declining value of the dollar is equivalent to an
increasing value of the euro. Exchange rates can only be expressed relative to
another currency. However, for many purposes it is more useful to express the value
of a currency relative to the value of a basket of currencies of the nation’s important
trading partners. In this case, the value of a particular currency rises or falls against
the weighted average of the nation’s trading partners, with the same symmetrical
value relationship holding.
When the value of a currency is market determined, the event that initiates a
change in the exchange rate is usually a change in the demand and/or supply of
assets(the international capital market), or a change in the demand and/or supply of
goods and services in international trade. As a nation’s currency is rising in value,
or appreciating, the nation will typically move toward a trade deficit, as imports
become cheaper and exports more expensive, as well as experiencing a net inflow
of foreign capital. When the nation’s currency is falling in value, or depreciating, the
nation will typically move toward a trade surplus and experience a net outflow of
capital.
Is it then better to have a currency whose value is rising or falling, high or low?
The answer depends on where you stand in the economic system. A high, or
appreciating, dollar is good for U.S. buyers of imported goods, which seem cheap in
comparison to domestic goods. The resulting inflow of lower cost imported goods
also keeps domestic inflation low. The same high, or appreciating, dollar is bad if
you are the owner of, or a worker in, a firm that is in an import competing or export
oriented industry that is losing sales, profits and jobs to foreign competition. A low,
or depreciating, dollar should reverse the relative positions of consumers and
workers. In reality, these relationships are neither so clear, or simple. A
91Michael W. Klein, Scott Schuh, and Robert K. Triest, “Job Creation, Job Destruction, and
the Real Exchange Rate,” Journal of International Economics LIX:2 (March 2003), pp. 245-
248.
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manufacturer who competes in the export markets may rely on imported production
inputs or components that rise in cost as the dollar falls.92
The Dollar, the Trade Balance and Employment in Manufacturing.
Because the dollar exchange rate is determined in an open currency exchange
market, its value can be expected to change over time, reflecting, among other
things, changing conditions of demand and supply. Changes in the value of the dollar
are typically measured in terms of a trade-weighted index, generally including a set
of nations that are important industrial trading partners whose currencies are widely
traded on international markets.93 Figure 10 shows the movement of the nominal
major currencies dollar index from 1980 to September, 2003.
Figure 10. Exchange Value of the U.S. Dollar
On the basis of this index, the dollar reached its highest level in the history of
the data set in March 1985. The lowest level was attained ten years later in April
92A detailed account of changes in the value of the dollar since the 1980s and the resultant
consequences, from which this report draws, can be found in CRS Report RL31985, Weak
Dollar, Strong Dollar: Causes and Consequences, by Craig K. Elwell.
93Economists also use real exchange rate indexes that control for the relative differential
inflation rates in trading nations. The Federal Reserve real index of the dollar exchange rate
against major foreign currencies has generally paralleled the nominal index for the past 20
years, as most major trading nations have set a priority on bringing down rates of inflation.
Over the period covered in this report, the nominal and real major currencies indexes convey
a consistent picture of changes in the value of the dollar. The Federal Reserve reports the
value of both indexes on a monthly basis. The data are available at
http://www.federalreserve.gov/releases/H10/Summary.
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1995. From that low point, the dollar rose by approximately 40%, achieving a peak
value in February of 2002. By November 2003, more than 60% of that appreciation
had been reversed, leaving the dollar more than 14% higher than at the low point in
1995. Focusing on the last twelve months, the value of the dollar has declined every
month from October 2002 to July and August of 2003, when it increased in both
months. However, the total appreciation during those two months was only 3%,
giving a cumulative decline of more than 9% over the last year.
During the period January 1981 until the dollar peak of March 1985 the dollar
appreciated by approximately 47%. Manufacturing employment declined by about
4%. During the same period the goods balance of payments moved from a $28
billion deficit to a $120 billion deficit, over a fourfold increase. Goods exports fell
by about 2%, goods imports rose by 32%.94
The ten year period of general decline of the dollar after the peak of March 1985
until the low point of April 1995 resulted in a dollar depreciation of 45%.
Manufacturing employment again declined by approximately 4%. The goods balance
of payments varied over the period, deteriorating from 1985 to 1987 and then
improving from 1987 to 1992. Large, increasing, deficits characterized 1993-95,
reaching $174 billion in 1995. Goods exports increased by more than 160% over the
period, but goods imports rose by 121%, from an initial base of imports which were
more than 50% larger than exports in 1985.
Although the time-frames are different for the 1980-85 period of dollar
appreciation and the 1985-95 dollar depreciation, the magnitudes of dollar variation
are similar. Also similar is the fact that manufacturing employment declined in both
circumstances, albeit more slowly in the period of the falling dollar. On the basis of
this evidence, it would be hard to make the case that the exchange rate had the
theoretically predicted effect on manufacturing exports, production and employment
over these periods, although it is possible that a falling dollar exchange rate and
higher exports contributed to the modest increase in manufacturing employment in
the early 1990s. It is also possible that the effects of rising productivity, shifting
demand patterns and international capital mobility more than cancelled the effect of
the exchange rate during the 1990s.
The dollar again appreciated from April 1995 until it peaked in February of
2002, increasing in value by about 40%. Manufacturing employment declined by
approximately 10% over the period. The goods balance of payments deficit grew
sharply over this period, increasing from $174 billion in 1995 to $482 billion in
2002. Goods exports increased from 1995 to 2000 by about 34%, but then declined
in both 2001 and 2002, falling by about 12% in those two years. Goods imports
increased by 55% over the period.
94Import, export and trade balance data are from the U.S. Census Bureau, Foreign Trade
Division website, http://www.census.gov/foreign-trade. Goods trade is dominated by
manufactured goods which in 2002 represented 80% of U.S. goods exports and 84% of U.S.
goods imports.
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The period from January 2002 to November 2003 showed the overall value of
the dollar depreciating by about 17%. Manufacturing employment declined by an
additional 7% or 1.13 million jobs over the period. In at least one case, potential jobs
were lost because the value of the dollar declined. As reported in the New York
Times, Daimler-Chrysler announced the cancellation of a $750 million investment
in Georgia which might have generated 3000 jobs, at least in part because of dollar
depreciation which made the importation of components from Europe too expensive,
reflecting the point made earlier about the effect of a depreciating dollar on imported
production imports.95
While the exchange rate may be an important factor in determining the
competitiveness of U.S. manufacturing, it is hardly the only factor. Economic
recession, changes in productivity, changes in technology, as well as structural
changes in domestic and international business all play a role. Comparing Figures
1 and 10 shows that there are periods when the linkage between exchange rates and
employment appears consistent with exchange rate theory. For example, the decline
of the dollar after the peak attained in March 1985 is followed by a period in which
manufacturing employment stabilized and increased. However, the most recent data
seem, at this point, inconsistent with the theory. The decline in the dollar since
February 2002 has been accompanied by a sharp decline in manufacturing
employment, consistent with the domestic economic slowdown. Moreover, the data
on manufacturing employment as a share of total employment, shown in Figure 2,
suggest that manufacturing’s share of all employment has declined both in periods
when the dollar was appreciating and when it was depreciating. Although the speed
of the decline in employment might be affected by the exchange rate, its overall
trend has been downward since the 1960s.
Several research efforts have examined the forces influencing manufacturing
employment and have reached mixed conclusions. John A. Tatom, of the Federal
Reserve Bank of St. Louis, found little relationship between the exchange rate and
manufacturing employment. In fact, he found that in the 1980’s manufacturing
output expanded more during periods of a strengthening dollar than during periods
when the dollar was weakening. For Tatom, the principal factors in the decline in
manufacturing employment are productivity improvements and the sensitivity of
demand for manufactured goods during declines in over-all economic activity.
Productivity improvements tend to reduce the relative price of manufactured goods
and require fewer workers for any given level of output. The enhanced productivity
of workers suggests that firms should expand employment, while the decreasing
relative price of manufactured goods suggests that firms should reduce employment.
For the productivity effect to offset the price effect the demand for manufactured
goods should expand more than proportionately to a given fall in price. Tatom finds
that this is not the case, and the price responsiveness (elasticity) of manufactured
goods demand is low.96
95“DaimlerChrysler Drops Plan for Van Plant,” New York Times, (Sept. 24, 2003), p. C16.
96John A. Tatom, “Why Has Manufacturing Employment Decreased?” Federal Reserve
Bank of St. Louis Review, December 1986, pp. 15-25.
CRS-45
Michael Klein, Scott Schuh and Robert Triest of the Federal Reserve Bank of
Boston examined the relationship between job creation, job destruction and the real
exchange rate in the manufacturing industries. They found, using econometric
analysis applied to a data set from 1973-1993, a number of important relationships
between the exchange rate and manufacturing employment. First, the authors found
that the sensitivity of job destruction to the exchange rate depends on the openness
of that particular industry to trade, either in exports or in import competition. This
result is expected. Second, they found that while job destruction is related to the
exchange rate, job creation is significantly less related. This asymmetric relationship
implies that when the dollar appreciates the rate of job loss is accelerated, but when
the dollar depreciates, jobs are not necessarily created. The rate of manufacturing job
destruction merely returns to its historic trend. This relationship appears to be
continuing in more recent data where it consistently appears that higher values of the
dollar may contribute to job losses, but a decline in the dollar rarely reverses the
situation.97
If the Klein, Schuh and Triest results are an accurate description of the forces
facing the manufacturing industry, policy based on realigning exchange rates can be
expected to have only limited effectiveness. From this perspective, an appreciation
of the Chinese yuan, or the other Asian currencies against the dollar might slow the
rate of job loss in American manufacturing, but would be unlikely to cause net job
creation. A different perspective is provided by C. Fred Bergsten of the Institute for
International Economics. He feels that an appreciation of the Chinese yuan on the
order of 20-25% would also encourage a number of other East Asian countries to
allow their currencies to appreciate. Such a regional currency appreciation could lead
to the creation of as many as 500,000 U.S. manufacturing jobs, in Bergsten’s view.98
Asian Economies and the Dollar. Considerable concern has been
expressed that many Asian countries have been deliberately keeping their currencies
undervalued against the U.S. dollar, in order to promote their exports. This view has
been emphasized by the Coalition for a Sound Dollar, an advocacy group made up
of more than 80 trade associations, who believe the strong dollar is still damaging
American manufacturing.99 They feel that the real problem lies mainly with four
nations, China, Japan, Korea and Taiwan, who, the Coalition charges, have taken
actions to keep the values of their currencies artificially low to gain an export
advantage, or to impair or negate trade concessions. The Coalition asserts that such
policies could be in violation of World Trade Organization and International
Monetary Fund rules.
As evidence for their charges, the Coalition cites seven instances of currency
intervention by Japan, totaling $33 billion in 2002, that were designed to keep the
value of the dollar above ¥115. They cite similar interventions, designed to weaken
97Klein, Schuh, and Triest, pp. 255-259.
98C. Fred Bergsten, comments on PBS Newshour with Jim Lehrer (Sept. 3, 2003) at
http://www.pbs.org/newshour/bb/economy/july-dec03/China_09-03.html, cited in Wayne
M. Morrison, “China’s Currency Peg,” EBTRA136 in CRS Trade Briefing Book.
99Coalition for a Sound Dollar, The Overvalued Dollar – Six Years Later, available at the
website http://www.ssci.org/images/mfg-report.pdf..
CRS-46
the yen in 2001, totaling $28 billion. The Coalition also cites numerous threats of
intervention by Japanese government officials lauding a weaker yen and threatening
currency market intervention. For Taiwan and Korea similar interventions are
described, with these nations buying $60 billion to weaken their currencies against
the dollar. But other observers do not attribute such currency actions to a desire to
manipulate exchange rates in order to increase exports. They have characterized the
Japanese intervention and other measures merely as a means to manage the decline
of the dollar to prevent it from falling too quickly, which could have damaging
effects on the Japanese economy.100
Until very recently, and then only with respect to the Japanese yen, there has
been very little movement of the dollar against the currencies of Japan, Taiwan, and
South Korea. Over the period August 2002 to August 2003 the dollar declined by
almost 9% as measured by the major currencies index. Over the same period, the yen
itself changed little against the dollar. In August 2002, the yen traded at 118.99 to
the dollar and in August 2003 it traded at 118.66 to the dollar, a variation of less than
0.3%. The dollar weakened by 1.5% against the Korean won and appreciated by 1%
against the Taiwan dollar over the same period.
During the period August 2003 to November 2003 the dollar declined by 6%
against the major currencies index. The dollar also declined, by 8%, against the yen.
The dollar has stayed much steadier against the other two East Asian currencies: from
August 2003 to November 2003 it appreciated by 0.6% against the won and
depreciated by 1% against the Taiwan dollar.
Problems exist in establishing clear causality between these currency
interventions and fluctuations in the exchange rate. In 2001, foreign exchange
transactions were $1.4 trillion per day on world currency markets.101 Total reserves
held in central banks worldwide were $1.7 trillion. Over 90% of foreign exchange
market transactions are carried out by foreign exchange dealers and financial
institutions. Currency interventions on the scale of those cited by the Coalition for
a Sound Dollar by Japan and other nations may not have been sufficient to stabilize
the value of the yen and other currencies at a value that was far from a market
equilibrium. An unmeasurable influence is the degree to which the Japanese actions
signaled the market, altering the actual market outcome.
The case of China is very different from that of Japan and many other Asian
exporters. China has maintained a fixed exchange rate of approximately 8.3 yuan per
dollar since 1994. The value of the yuan does not float against the dollar and China
maintains controls on capital. China has a huge goods surplus in its trade balance
with the United States, the trade deficit totaling $54 billion in the first six months of
2003,102 and holds foreign exchange reserves in excess of $300 billion. Many
100Christian E. Weller and Laura Singleton, Reining in Exchange Rates: A Better Way to
Stabilize the Global Economy, Economic Policy Institute, Briefing Paper #131, Sept. 2002,
p.5.
101The amount of currency that actually changes hand on a settlement basis is a fraction of
this total.
102FT900 (June 2003), Exhibit 14.
CRS-47
observers agree that the yuan is undervalued, which has contributed to this trade
imbalance and the resulting buildup of financial surpluses in China. The extent to
which the yuan is undervalued is open to question. The Economist magazine
estimates the level at 56%, while an economist at the Manufacturers Alliance trade
association estimates 40%, and other analysts suggest a level of 10-15%.103
Secretary of the Treasury John Snow undertook a trip to China in September of 2003
to discuss the exchange rate imbalance with Chinese leadership. The Chinese offered
to allow the yuan’s value to float in the market at some time in the future, but made
no definite commitment.
The Chinese may have good reasons not to be eager to jump into the world of
market determined exchange rates. The fixed value of the yuan was looked at as an
important pillar of stability during the Asian financial crisis of 1997-98. China’s
current account trade surplus is based largely on U.S. trade, and its surplus with the
rest of the world has been declining. With capital constraints in place it is difficult
to assess the true value of the yuan. If capital were allowed to flow freely, it is not
inconceivable that capital might flow out of China on a net basis which would tend
to push the value of the yuan lower. The fixed exchange rate policy of China reflects
its desire for stability. Until the economic structure of China is judged to be capable
of withstanding the volatility of world markets, the likelihood of a change in China’s
exchange rate policy may be low.104
On October 30, 2003 Treasury Secretary John Snow presented the Treasury
Department view on this issue, when he discussed the semiannual report to Congress
on exchange rates and international economic issues. The report’s purpose is partly
to evaluate the exchange rate policies of many trading nations. The report, which
reviewed developments in the first half of 2003, concluded that no nations, including
China and Japan, were manipulating the value of their currencies to obtain unfair
trade advantage. Secretary Snow acknowledged that, while China continued to peg
its currency to the dollar and Japan had been intervening in currency markets, those
actions in themselves did not meet the technical requirements under the Omnibus
Trade and Competitiveness Act of 1988 to support a finding of unfair currency
manipulation.105
Secretary Snow reiterated the Bush Administration’s belief that currencies of
major nations, including China and Japan should be market determined. He also
pointed out that the Administration believes that bilateral financial diplomacy was
103“Flying on One Engine: A Survey of the World Economy,” The Economist, Sept. 20,
2003, p.25.
104For more detail, see CRS Report RS21625, China’s Currency Peg: Implications for the
U.S. and Chinese Economies, by Wayne M. Morrison and Marc Labonte.
105U.S. Dept. of the Treasury. “Testimony of Treasury Secretary John Snow Before the
Senate Committee on Banking, Housing and Urban Affairs” (Oct. 30, 2003), pp. 1, 3-4; and,
Report to Congress on International Economic and Exchange Rate Policies, JS-954 (Oct.
30, 2003), pp. 1, 6-7.
CRS-48
the course of action most likely to result in movement toward the goal of market-
determined currency values.106
Federal Reserve Board Chairman Alan Greenspan pointed out in a recent speech
that if, as most observers seem to agree, the value of the Chinese yuan is out of
alignment with market valuation, this might very well have adverse effects on world
capital markets and, at least indirectly, affect U.S. jobs and employment. He did not,
however, see a revaluation of the yuan as having much effect on aggregate U.S.
employment. The reason is that if currency realignment reduced imports from China,
they would tend to be replaced by imports from other nations that compete with
China. He further noted that a rapid exposure of the yuan to market forces would
have uncertain consequences for China’s fragile banking system as well as providing
no guarantee that the yuan would actually rise in value. He also stated that the
potential long term benefits to the world trading system of a prosperous China are
important enough that a careful approach to currency valuation and market
determined capital flows should be followed.107
The Impact of U.S. Trade Agreements108
The United States has been actively pursuing trade agreements over the last two
decades. It has had free trade agreements with Canada and Israel since the 1980s.
In 1994, it implemented the North America Free Trade Agreement (NAFTA) with
Mexico and Canada. Since then, it has concluded several agreements and is actively
pursuing others. Free trade agreements raise some important policy issues for
Congress as it considers the implementing legislation, including the impact on U.S.
manufacturing.
In 2000, the United States completed negotiations with Jordan for a bilateral
free trade agreement, which went into effect in September 2001. At the end of 2002,
the United States completed free trade agreements with Chile and Singapore, which
were approved by Congress and signed into law in 2003.109 The broadest initiative
has been the multilateral trade negotiations in the World Trade organization (WTO),
known as the Doha Round. Another major initiative is the Free Trade Area of the
Americas (FTAA), in which the United States is continuing trade negotiations with
33 other Western Hemispheric countries. In 2003, the Bush Administration launched
negotiations to establish free trade agreements with Morocco, with the Central
American Common Market (CACM), with the South African Customs Union
106Snow, “Testimony,” p. 4.
107Federal Reserve Board of Governors. “Remarks by Chairman Alan Greenspan Before the
World Affairs Council of Greater Dallas,” (Dallas, TX, December 11, 2003).
108This section was written by M. Angeles Villarreal.
109P.L. 108-77 (Chile) and P.L. 108-78 (Singapore). For details on the agreements see: CRS
Report RL31789, U.S. Singapore Free Trade Agreement by Dick K. Nanto, and CRS Report
RL31144, U.S.-Chile Free Trade Agreement: Economic and Trade Policy Issues, by J.F.
Hornbeck. For issues related to labor see: CRS Report RS21560, Free Trade Agreements
with Singapore and Chile: Labor Issues, by Mary Jane Bolle.
CRS-49
(SACU), and with Australia. Other potential trade initiatives are under discussion.
Effects of NAFTA on US. Industry. In the early 1990s, the United States
entered into trade negotiations with Mexico, which later included Canada, to form
the North American Free Trade Agreement, effective in January 1994. NAFTA is
the first major trade agreement the United States has had with a developing country
where per capita income is much lower than in the United States. The difference in
income levels raised concerns that Mexico’s lower wages would lead to a large
number of U.S. jobs being relocated to Mexico as industries adjusted to the changes
in trade and investment regulations. While the integration of the U.S., Mexican, and
Canadian economies was expected to make the U.S. economy more productive and
globally competitive, the adjustment costs were expected to be more concentrated in
communities with a large number of manufacturing jobs, such as the automotive,
textiles, and apparel industries.
After nine years of implementation, the full effects of NAFTA on the U.S.
economy are still unclear. Proponents of NAFTA claim that the agreement has
increased U.S. trade with Mexico and Canada, and benefitted the U.S. economy.
They believe that NAFTA has had a positive impact on U.S. trade and investment
with Canada and Mexico, and that NAFTA has increased U.S. exports to Canada and
Mexico.110 Critics of NAFTA argue that hundreds of thousands of U.S. jobs have
been lost because of the agreement. NAFTA critics generally base their arguments
on the increasing trade deficit with Mexico, stating that increasing U.S. imports from
Mexico have caused plant closures and job losses in the United States.
There are a number of reasons why the overall effects of NAFTA are not easily
measured. First, it is difficult to isolate the effects of NAFTA because of other
variables affecting trade and investment such as economic growth and exchange
rates, both of which affect consumer spending and the demand for imports, foreign
investment, employment levels, and relative wages. Second, some of the market
opening measures in Mexico that resulted from NAFTA were already taking place
prior to the agreement and NAFTA may have only accelerated the process. While
trade expansion arguably has benefitted the overall U.S. economy in terms of
improved production processes, and the increased availability of goods and services
for U.S. consumers at lower cost, there also have been job losses associated with
NAFTA. Two of the U.S. workforce sectors that have been most affected are the
textiles and apparel industry, and the automotive industry.
The overall effect of NAFTA on the U.S. economy has been relatively small,
primarily because two-way trade with Mexico amounts to less than three percent of
U.S. GDP. Therefore, any changes in trade patterns with Mexico would not be
significant in relation to the overall U.S. economy. In some sectors, however, trade-
related effects could be expected to be more significant, especially in those industries
that were more exposed to the removal of tariff and non-tariff trade barriers, such as
110See Council of the Americas and the U.S. Council of the Mexico-U.S. Business
Committee, NAFTA at Five Years, prepared by the Trade Partnership, Washington, D.C.,
January 1999.
CRS-50
the textile and apparel, and automotive industries. Most of the trade-related effects
of NAFTA may be attributed to changes in U.S. trade and investment patterns with
Mexico. At the time of NAFTA implementation, the U.S.-Canada Free Trade
Agreement already had been in effect for five years and some industries in the United
States and Canada were already highly integrated. Most tariffs on industrial products
traded between the United States and Canada were zero at the time of NAFTA
implementation. In contrast, Mexico had followed an aggressive import-substitution
policy for many years prior to NAFTA in which it had sought to develop certain
domestic industries through trade protection.
The Department of Labor NAFTA-Trade Adjustment Assistance111 program
provides some data on the number of workers covered by certification. The number
of certified workers is not the same as the number of jobs lost due to NAFTA, but it
provides some indication of the adjustment costs of NAFTA.112 Between January
1994 and December 2001, 415,371 workers were covered by NAFTA-TAA
certification. The industry with the highest number of NAFTA-TAA certified jobs
was textiles and apparel, with 34% of total NAFTA-TAA certification, followed by
the automotive industry, with 6% of the total. NAFTA-TAA certification figures
may overestimate job losses among certified workers because not all certified
workers may have actually lost their jobs. Data from the Department of Labor
suggest that as few as 20-30% of certified workers collect NAFTA-TAA benefits.
Certified workers may not have actually lost their jobs, may have found another job,
or may not have collected benefits for other reasons.113 On the other hand, the actual
number of jobs lost may be higher than the number of those certified, because not all
workers who have lost their jobs due to import competition or production shifts have
necessarily applied for, or would qualify for, certification.
The main NAFTA provisions related to textiles and apparel were the elimination
of U.S. tariffs and quotas for goods coming from Mexico, and elimination of
Mexican tariffs on U.S. textile and apparel products. Goods are required to meet the
rules of origin provision, assuring that apparel products traded among the three
NAFTA partners are made of yarn and fabric made within the free trade area.
Without a rules of origin provision, apparel companies would have been able to
import low-cost fabrics from Asia and export the final product to the United States
under the free trade provisions. Textile and apparel quotas, as observed earlier in this
report, will be eliminated in January 2005.
Between 1993 and 2001, U.S. trade in textiles and apparel with Mexico
increased more rapidly than U.S. trade with all countries, suggesting that Mexico
111Congress included a NAFTA Transitional Adjustment Assistance (NAFTA-TAA)
Program in the NAFTA implementing legislation to address concerns regarding worker
dislocations. The NAFTA-TAA Program, which was later consolidated with the former
Trade Adjustment Assistance (TAA) program and is now part of a new reformed TAA
Program, provided assistance to workers who lost their jobs due directly to import
competition or production shifts to Mexico or Canada.
112CRS Report RS20229, p. 6.
113CRS Report 98-782 E, NAFTA: Estimated U.S. Job “Gains” and “Losses” by State Over
5 ½ Years, updated February 2, 2000, pp. 2-3.
CRS-51
may be supplying the U.S. market with goods that would have otherwise been
supplied by Asian countries. The share of U.S. trade with Mexico in textiles and
apparel increased from 8% of U.S. world trade in textiles and apparel in 1993 to 16%
percent in 2001. In comparison, the share of U.S. trade with Asia in textiles and
apparel decreased from 55% in 1993 to 45% in 2001. The trade deficit with Mexico
in textiles and apparel also increased more rapidly than the total U.S. deficit in these
products, from $760 million in 1993 to $4.2 billion in 2001. While the large increase
in U.S. imports from Mexico may have displaced U.S. workers in the textiles and
apparel industries, some studies have suggested that NAFTA may have helped the
U.S. textile industry by shifting production from Asian countries to North America.
For example, one study reports that U.S. imports from NAFTA countries tend to have
a higher U.S. content than imports from outside the region, such as China, Hong
Kong, and Taiwan.114
Automotive NAFTA provisions include the phased elimination of tariffs,
gradual removal of many non-tariff barriers to trade, rules of origin provisions,
enhanced protection of intellectual property rights, less restrictive government
procurement practices, and the elimination of performance requirements on investors
from other NAFTA countries. Its significance is summarized in Table 5. Because
the United States and Canada were already highly integrated following the U.S.-
Canada Free Trade Agreement and a U.S.-Canada Auto Pact in 1965, most of the
impacts of NAFTA relate to trade liberalization with Mexico. In particular, NAFTA
required the removal of Mexico’s restrictive trade and investment policies. Mexican
tariffs on all types of motor vehicles and parts, which were as high as 20% for some
goods, were scheduled to be completely phased out by 2003. In addition, Mexico
agreed to lower or entirely remove investment restrictions in the automotive sector,
which provided an incentive to increase U.S. investment in Mexico. The United
States eliminated the 2.5% tariff on motor vehicles manufactured in Mexico and
phased out the 25% tariffs on Mexican light trucks. The United States also phased
out tariffs on most Mexican auto parts.
Mexico’s importance to the U.S. motor vehicle industry has increased in
significance as a result. U.S. motor vehicle exports to Mexico increased from almost
nothing in 1993 to $3.9 billion in 2002. But imports from Mexico increased from
$3.7 billion in 1993 to $20.9 billion in 2002, representing an increase of 465%, faster
than any other major source. By value, motor vehicle imports from Mexico increased
from 6% to 16% of the U.S. total over the past ten years. However, the combined
share of Mexico and Canada in the total vehicle and parts import market increased
only from 47% to 49%. Other than the big jump in exports of completed vehicles to
Mexico, there was not much on the export side either, as the combined NAFTA share
of vehicle and parts exports increased only from 66% to 70%.
114U.S. International Trade Commission. Impact of the North American Free Trade
Agreement on the U.S. Economy and Industries: A Three Year Review, Publication 3045
(July 1997), p. 82.
CRS-52
Table 5. U.S. Trade in the Automotive Industry, 1993 -2003
(All figures in billions of U.S. dollars)
Country/
1993
2002
YTD2002
YTD2003
Category
Exps.
Imps.
Exps.
Imps.
Exps.
Imps.
Exps.
Imps.
Canada
Motor Vehicles
9.2
26.7
15.9
41.4
8.2
21.6
9.7
20.9
Auto Parts
18.2
10.3
28.0
17.2
14.7
8.8
14.6
9.2
Total
27.4
37.0
43.9
58.6
22.9
30.4
24.3
30.1
Japan
Motor Vehicles
1.2
23.3
0.5
35.5
0.2
16.6
0.2
16.5
Auto Parts
1.1
12.3
2.3
13.5
1.1
6.8
1.1
6.8
Total
2.3
35.6
2.8
49.0
1.3
23.4
1.3
23.3
Mexico
Motor Vehicles
0.2
3.7
3.9
20.9
2.0
10.5
1.6
9.8
Auto Parts
7.3
7.4
11.3
20.1
5.9
10.0
5.3
10.6
Total
7.5
11.1
15.2
41.0
7.9
20.5
6.9
20.4
Germany
Motor Vehicles
0.9
5.4
2.8
17.8
1.4
7.8
1.9
9.7
Auto Parts
0.8
2.0
0.9
4.3
0.5
2.0
0.5
2.7
Total
1.7
7.4
3.7
22.1
1.9
9.8
2.4
12.4
World
Motor Vehicles
18.9
63.0
27.8
132.4
14.0
64.5
16.2
66.1
Auto Parts
33.4
38.3
50.1
69.1
26.2
34.3
25.2
37.1
Total
52.3
101.3
77.9
201.5
40.1
98.9
41.4
103.2
Year-to-date data based on January-June totals.
Note: Motor Vehicles includes cars, minivans, sport-utilities, light and heavy trucks, other types of
motor vehicles designed for the transport of persons, and special purpose vehicles not elsewhere
classified.
Source: U.S. Dept. of Commerce. Bureau of the Census, using Office of Automotive Affairs Product
Groups (http://www.ita.doc.gov/td/auto/aid.html, as viewed October 8, 2003).
China’s Accession to the WTO. On December 11, 2001, after 15 years of
negotiations, China formally joined the World Trade Organization (WTO), the
international institution that administers multilateral trade rules and serves as a forum
to negotiate trade agreements. In joining the WTO, China agreed to substantially
liberalize its trade and investment regimes over a number of years. The WTO
accession agreement requires China to take a number of trade liberalization measures
over stated time periods to reduce a wide variety of tariff and non-tariff barriers.
China agreed to cut overall average industrial tariffs from 24.6% to 9.4% by 2005
and to cut average tariffs on information technology products from 13.3% to zero by
2005.115
115CRS Trade Briefing Book, China’s Accession to the WTO, by Wayne M. Morrison,
updated July 23, 2003 at http://www.congress.gov/brbk/html/ebtra92.html. For a broader
CRS-53
In industrial goods in general, China agreed to reduce tariffs from a base average
of 25% (in 1997) to 7%. China also agreed to participate in the Information
Technology Agreement, requiring the elimination of tariffs on computers,
semiconductors and other information technology products. China agreed to
eliminate these tariffs by January 1, 2005.116 China agreed to eliminate all subsidies
on industrial goods, such as export and import substitution subsidies, that are
prohibited under WTO rules. In the automotive sector, China agreed to reduce tariffs
on autos from 80-100% to 25% by July 1, 2006. In auto parts, tariffs are to be
reduced by an average of 17.4% to an average of 9.5% by July 1, 2006. China
pledged to phase out quotas on autos by January 1, 2005, and allow U.S. financial
firms to provide financing for the purchase of cars in China. Prior to its accession,
China did not generally permit foreign companies to distribute products through
wholesale and retail systems in China, or to provide related distribution services such
as repair and maintenance services. China agreed to phase out these prohibitions
over three years for most products, including autos and auto parts.117
China will reduce its tariffs on textile and apparel products from an average
tariff of 20.1% to 11.5%. China eliminated its previous system of quotas on U.S.
textile exports and agreed to establish a tariff-rate quota system for some textile
products. The United States agreed to apply the WTO Agreement on Textiles and
Clothing (ATC) to China in which it agrees to phase out its quotas on textile
products. Under the agreement, all textile and apparel quotas are being phased out
over a 10-year period, with full elimination of quota restrictions on WTO members
occurring in January 2005. China’s phase-out period will be faster since it joined the
agreement at a much later date. The United States retains a right to apply special
safeguard mechanisms exclusively to China for specified periods, if warranted by
import surges. As noted above in the subsection on textiles and apparel, the Bush
Administration has initiated such safeguards with respect to increases in imports of
three apparel products.
The overall effect on U.S. manufacturing of China’s accession to the WTO is
uncertain, primarily because it has been less than two years since China’s entry was
formally approved. U.S. trade barriers are generally low. Reforms in China’s trade
and investment regulations, which are usually more restrictive, could increase U.S.
exports. China’s entry into the WTO requires significant reforms to its trade regime,
including a reduction in foreign investment restrictions, which could result in
significant new opportunities for U.S. exporters and for U.S. investment in China.
The liberalization of foreign investment regulations in China could provide an
incentive for U.S. manufacturing firms to relocate production facilities to China. In
the United States, the reduction of U.S. trade barriers for Chinese imports could
increase the amount of imports coming from China.
look at U.S.-China trade relations, see CRS Issue Brief IB91121, China-U.S. Trade Issues,
by the same author.
116United States Trade Representative, China’s Accession to the World Trade Organization
(WTO). See [http://www.ustr.gov/regions/china-hk-mongolia-taiwan/accession.shtml].
117U.S. Department of Commerce, International Trade Administration, Office of China
Economic Area, Industry Fact Sheets: Autos and Auto Parts. See
[http://www.mac.doc.gov/China/Docs/industryfactsheets/autos.html].
CRS-54
Some analysts argue that China’s entry to the WTO will accelerate the rising
trade deficit with China and severely affect employment in manufacturing, the sector
most likely to be adversely affected by trade.118 While economists generally believe
that trade deficits in the United States have not hampered the overall creation of jobs,
they do influence the types of jobs that are created because of the trade-related
changes in composition of U.S. output.119 The United States has had a rising trade
deficit with China since the late 1980s, long before China’s entry to the WTO. In
2000, the year prior to China’s accession to the WTO, the United States had a
merchandise trade deficit with China of $83.8 billion. By 2002, the trade deficit had
increased 24% to $103.1 billion. Increases in U.S. imports from China since 2001
cannot be attributed entirely to China’s WTO accession. The accession may
accelerate changes in trade and investment, particularly in certain industries, but
these effects are not easily measured.
A study by the U.S. International Trade Commission on the effects on the U.S.
economy of China’s accession to the WTO estimated the effects of the removal of
China’s trade barriers. The study found that U.S. exports to China and U.S. foreign
investment in China are likely to increase as a result of China’s removal of non-tariff
barriers. Non-tariff trade barriers were part of China’s industrial policy to achieve
economic development of specific industry sectors. The ITC study found that
because the number of non-tariff barriers overlapped across industries, it is difficult
to isolate the effect of an individual barrier or the impact of removing one barrier
relative to another. The report states that U.S. manufacturing industries would
benefit from the following changes in China’s non-tariff trade regulations: new
official rules and mechanisms for technology transfer and the protection of
intellectual property rights; elimination of China’s export performance requirements;
and the removal of domestic content requirements.120
The textile and apparel industries may be among the manufacturing industries
most likely to be affected. The ITC study examined the impact of China’s
participation in the ATC and estimated that the overall effect on the U.S. economy
would be positive but that U.S. apparel producers would experience the more adverse
effects. The study estimated that the United States would experience economy-wide
welfare gains of $2.6 billion in 2006, and a GDP increase of about $1.9 billion. This
was projected to occur from efficiency gains from factor reallocation in the U.S.
economy, and from lower-priced goods imported into the United States. The results
of the study predicted that China’s participation in the ATC would likely have a
small impact on U.S. imports of textiles and a larger effect on U.S. imports of
apparel. The study suggested that the increase in China’s exports of textiles and
apparel would likely come at the expense of other suppliers to the U.S. market, but
that the U.S. textile and apparel industries could also be affected. This study
118See Economic Policy Institute, The High Cost of the China-WTO Deal, February 16, 2000.
119In the 1990s, the overall U.S. trade deficit increased considerably while the U.S. economy
expanded and full employment levels were attained. For more information see CRS Report
RL30534, America’s Growing Current Account Deficit: Its Cause and What it Means for
the U.S. Economy, by Craig Elwell.
120U.S. International Trade Commission, Assessment of the Economic Effects on the United
States of China’s Accession to the WTO, Publication 3228, August 1999.
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predicted that the most serious adverse effects would likely be experienced after
December 31, 2004, the end of the phase-out period, but, as noted earlier the Bush
Administration has already initiated certain safeguard actions on imports of Chinese
textile and apparel products.121
These findings on textiles and apparel, if applied more broadly to the full range
of consumer goods, reinforce the view expressed to Congress in testimony by
Gregory Mankiw, Chairman of the Council of Economic Advisers (CEA). He noted
that 60% of U.S. imports from China consisted of consumer goods, and only 28% of
capital goods, while 47% of U.S. exports to China were capital goods. Mankiw
argued that this is compatible with the comparative advantage of each country, with
China specializing in “items that are relatively intensive in the use of less-skilled
labor,” while U.S. manufactured exports “tend to be goods that are made by relatively
high-skilled workers ...” Mankiw further noted that, while imports from China
increased as a percentage of total U.S. imports, the percentage of imports from other
Pacific Rim countries had fallen, leading him to conclude that the major impact was
displacement of imports from the other Asia countries. Moreover, Mankiw stated,
the share of the increase in the U.S. trade deficit since 1997 accounted for by trade
with China was less than that of Mexico and of the 12 countries in the euro area.122
Industrial Policy and Industrial Competitiveness Policy123
Worldwide, there is a long tradition of government interventions in economies
to guide market decisions. These policies have ranged from protectionist trade
policies to promote export-led growth, or growth through import substitution, to
national economic planning systems in which a government co-ordinates the
structure of the economic system, or picks winning industries and firms to champion.
There are also a vast array of targeted subsidies, preferential loans, research and
development subsidies, and tax incentives designed to improve the performance of
the economy, or a specific sector, to achieve higher growth, higher employment, and
trade surpluses. Over time, these policies have gained the collective name industrial
policy.
Industrial policy may take the form of a formal system supported by a
government agency or department, or a collection of policies that may simply be
identified as such. In a broad sense, every nation has an industrial policy simply
through the existence of policies which affect firms, industries, and markets. In
many cases these policies are uncoordinated and sometimes contradictory. Interest
in industrial policy peaked in the 1980s as the seeming economic success of Japan
and other Asian nations suggested to many that a new form of market capitalism
might be on the rise. The failure of Japanese economic policies from the 1990s to
the present, the Asian financial crisis of the late 1990s, as well as the success of the
121Ibid.
122House Committee on Ways and Means. “Statement of N. Gregory Mankiw, Chairman,
Council of Economic Advisers,” October 30, 2003, pp. 3-6.
123This section was written by Robert Pirog and Stephen Cooney.
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more free market oriented United States economy in the 1990s, caused interest in
various forms of industrial policy to diminish.
Planning in Market Economies
Japan and France are examples of democratic nations that have instituted more
formalized versions of industrial policy. Both nations emerged from World War II
with shattered economic and industrial structures. Each established government
agencies to guide and coordinate reconstruction decisions. Japan set up the Ministry
of International Trade and Industry (MITI) while the French created the Planning
Commission. From the late 1940s until the oil shock of 1973 both nations
experienced substantial economic growth and made major strides in rebuilding their
economies.
MITI provided formal and informal guidance to industries on modernization,
technology, investment strategy and domestic and international competition. This
was accomplished through a consensus-based policy which drew together industrial,
financial, and government components to accomplish national industrial and foreign
trade goals. MITI provided protection from import competition, technological
intelligence, assistance in licensing foreign technology. It also assisted in expediting
mergers, coordinating investment, and obtaining foreign exchange.124 Through the
use of these policies MITI gained the reputation, at least outside of Japan, of being
effective at picking winning industries to encourage. The MITI -led Japanese model,
often referred to as “Japan, Inc.,” highlighted economic growth led by the export
oriented sectors of the economy. A foreign trade policy that restricted imports and
encouraged exports led to the accumulation of trade surpluses which provided
substantial reserves of capital to finance further development.125
After World War II the French instituted a system called indicative planning. The
Planning Commission created committees of major firms, public enterprises, unions
and technical experts to exchange information and set consistent goals for the
relevant industry, and ultimately the French economy. While the Planning
Commission did not engage in mandatory, centralized planning, it exerted significant
influence on economy in the hope of rationalizing economic decisions.126
The economic performances of both Japan and France deteriorated, even while
their planning functions continued to operate. Japan achieved strong economic
growth until the 1990s when its economy entered a period of stagnation from which
it has yet to recover. French economic difficulties began in the late 1970s and
continued into the early 1990s. During this period the French economy also went
124Daniel Yergin and Joseph Stanislaw, The Commanding Heights (New York: Simon and
Schuster, 1999), pp. 164-65.
125An alternative view is that Japanese development was fueled by a high domestic savings
rate relative to investment. The two sources of surplus are linked by the simple
macroeconomic equilibrium condition S-I =X-M where S is savings, I is gross domestic
investment, X is exports, and M is imports. The two approaches are broadly compatible
assuming the existence of appropriate transfer mechanisms within the economy.
126Yergin and Stanislaw, pp. 27-32.
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through periods of nationalization and denationalization, as well as integration into
the European Union.
While the economy was performing well, MITI was given credit for skillfully
orchestrating Japanese ascendency in a number of key export oriented industries.
More recent analysts have begun to question MITI performance. MITI did not see
the commercial value of transistors and worked to discourage Sony from acquiring
production rights from Western Electric. MITI thought there were too many
automobile firms in Japan and tried to encourage mergers which would only have left
two firms, Nissan and Toyota. Japanese banking practices and provision of capital
to industry were critical to the consensual capitalist model favored in the 1980s, but
for the past decade Japanese banks have been overburdened with non-performing
debt which has been a major drag on the financial system.127
The issue these, and other, incidents highlight is the role of information and
choice in a market economy. Can government agencies make better resource
allocation decisions than individual market participants? The Japanese and French
experiences suggest the difficulties that nations might experience over time. Both
nations have recast their national industrial planning efforts. Both MITI and the
Planning Commission have been reorganized and have focused their efforts on public
policy analysis and away from direct targeting and planning.128 In Japan, MITI has
been reconstituted as METI, the Ministry of Economy Trade and Industry. The Key
Points of its Fiscal Year 2004 Economic and Industrial Policy focuses on
macroeconomic performance and competitiveness of Japanese markets.
But aspects of these industrial policy approaches persist. For example, METI
reportedly continues to be involved in a more limited way in actively supporting
Japanese semiconductor industry R&D activities.129 A similar supportive role is being
played by the Korean government toward its semiconductor industry.130 A study for
the U.S. Semiconductor Industry Association on China’s semiconductor industry,
cited above, notes a distinctive Taiwanese model of industrial policy, which is being
explicitly integrated into the Chinese context by the present government of China:
... [A]ll of Taiwan’s principal policies in this sector are now being closely paralleled
on the mainland – tax holidays, the establishment of science-based industrial parks,
spinoff of government research institutes, preferential lending, promotion of
semiconductor foundries, lucrative financial incentives for key personnel, and
passive government minority investments in semiconductor enterprises.131
127Karl Zinsmeister, “MITI Mouse,” Policy Review no. 64 (Spring 1993), pp. 28-36.
128 See the website http://www.meti.go.jp/english/policy/index_metipolicies.html (Viewed
on October 6, 2003).
129Yoshiko Hara, “Japan Pins a Rebound on Joint R&D in Post-PC Era,” Electronic
Engineering Times (Oct. 13, 2003).
130Korea Herald, “Korea Scrambling to Develop Next- Generation Chips” (Oct. 20, 2003).
131Howell et al.,China’s Emerging Semiconductor Industry, ch. 2. Quotation is on p. 50.
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Other countries reportedly are engaging in bailout policies to preserve traditional
industries that have fallen on hard times. A single recent edition of the Financial
Times carried articles regarding criticisms of such policies in China and Europe. U.S.
Secretary of Commerce Don Evans was reported as telling the Chinese government
that it should end “its system of state subsidies by ceasing to provide loans from
state-owned banks to unprofitable state-owned businesses.” State businesses were
estimated to provide about 50 million jobs in China, a large portion of the urban
workforce. Meanwhile, the European Commission reported that European Union
member states subsidized 120 service and manufacturing companies during the
period 1999-2002. The French commitment to bail out the electrical engineering
firm Alstom could cost up to $2.4 billion. Germany, France, Italy, and Spain were
cited as responsible for 85 of the 120 European subsidy cases.132
While the United States has never had an overall industrial policy, it, like
virtually all nations, has engaged in policies to enhance the performance of various
sectors of the industrial economy. For example, in response to the changing market
for semiconductors and a decline in U.S. manufacturers share, SEMATECH,
described above, was formed in 1987 as a consortium of 14 U.S.-based
semiconductor manufacturers and the U.S. government, with financial support from
the Defense Department. The consortium sought to solve common manufacturing
problems through leveraging resources and sharing risk. By 1994 SEMATECH had
determined that the U.S. industry’s strength and market share were sufficient, and it
wanted to increase international participation in projects. It therefore decided to end
its acceptance of federal funding after 1996.133
There have been other limited sectoral programs of this type attempted or
developed in the United States, which included federal investment or participation,
and direct or indirect spinoff benefits for the private sector. Concerned about
reliance on foreign sources for flat-panel displays critical in some military
applications, for example, the Defense Department attempted to support a U.S.
manufacturing presence in this technology in the 1990s, but eventually abandoned
this effort. On a wider scale, the Department of Commerce National Institute of
Science and Technology sponsors the Advanced Technology Program (ATP), which
cost-shares the funding of technology R&D proposals, selected on a competitive
basis, which appear to have significant commercialization potential.134 Although
authorized at higher levels in the mid-1990s, average funding for the program in
132David Dombey, “Brussels Pinpoints EU States Most Likely to Bail Out Failing Groups,”
(p. 4) and “U.S. Steps Up Rhetoric Against China State Aid,” (p. 11) both in Financial
Times, Oct. 28, 2003.
133History of the Consortium, SEMATECH Corporate Information, 2003, available at the
website http://www.sematech.org/public/corporate/history/history.htm. This policy issue
is also summarized in CRS Report RL31708, Semiconductors: The High-Technology
Downturn and Issues in the 108th Congress, by Stephen Cooney
134Such programs were a major component of the Clinton Administration’s approach to U.S.
technology policy. For an update on the status of the ATP and another Commerce Dept.
program to assist small and medium-sized manufacturing companies, see CRS Reports 95-36
SPR, The Advanced Technology Program and 97-104 STM, Manufacturing Extension
Partnership Program: An Overview, both by Wendy H. Schacht.
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recent years has been about $200 million annually, and the Bush Administration has
proposed terminating it altogether.135 The National Academies Board on Science,
Technology and Economic Policy in May 2003 presented a briefing for Congress and
staff, at which some participants suggested consideration of a renewed government-
industry partnership to enhance advanced U.S. R&D activities critical to the
semiconductor industry, especially in view of the recent industry downturn and
lagging private sector resources.136
Such targeted programs frequently aim to assist industries in improving efficiency
and productivity. They may preserve or create some manufacturing jobs in the near
term. One concern with these policies is that, in the longer term, if they succeed in
improving worker productivity, a consequence may be reduced employment in the
specific industry targeted, even as the overall economy benefits. American
manufacturing has shown gains in productivity since the employment peak in 1979.
It may be that the strong growth in worker productivity, coupled with a low income
elasticity of demand for manufactured goods, is responsible for a significant share of
the secular decline in manufacturing employment.137 The huge advantage China
holds in terms of access to low cost labor, for example, is unlikely to be reversed by
policies that enhance the productivity of U.S. workers. The required increases in
productivity would have to be large enough to overcome the differences in U.S.
wages and benefits, in cases where low foreign wage costs are the key factor in
location decisions.
In citing the five industries that have contributed most significantly to U.S.
manufacturing job losses since 2000, CEA Chairman Mankiw, in his testimony to the
House Ways and Means Committee, noted that the top contributor was computer and
electronic equipment (16.0%) and semiconductors and components ranked fifth
(7.5%). These two industries are in high-technology fields, have high rates of
manufacturing productivity growth, and have benefitted from direct and indirect
federal R&D support. By contrast, the other three leading industries, contributing
just under 11% of total manufacturing job losses each, were more traditional
industries (machinery, fabricated metal products and transportation equipment).138
This comparison would seem to attenuate a connection between programs to target
industry R&D support, and job creation and preservation, although such policies may
well have other benefits to commend them.
135Budget of the U.S. Government. Fiscal 2004: Analytical Perspectives, p. 180.
136National Academies Board on Science, Technology and Economic Policy. “Future of the
U.S. Semiconductor Industry,” briefing, May 8, 2003. Background for the briefing was
provided in the comprehensive review, Securing the Future: Regional and National
Programs to Support the Semiconductor Industry, Charles W. Wessner, ed. (Washington,
DC: National Research Council, 2003).
137Income elasticity refers to the responsiveness of demand for manufactured goods in
response to an increase in society’s income. This point is made in the study by John A.
Tatom referred to earlier in this report.
138Mankiw, House Ways and Means Committee testimony, p. 7.
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Industrial Competitiveness Policy
The Organization for Economic Cooperation and Development (OECD) issued
a policy brief in 1997 which addressed the issue of industrial policy among member
nations.139 The OECD determined that while many members had pursued targeted
industrial policy based on either geographic or sectoral targets, by the late 1990s the
focus had shifted to implementing industrial competitiveness policy. The focus of
these newer policy measures is making the economy as a whole more conducive to
market transactions.
The OECD report identifies several reasons for this change in philosophy. The
globalization of the world economy and the opportunities available as a result,
changed the strategic focus of enterprises. Companies began to view the market for
inputs, labor and capital, as well as outputs, on a global scale, depending less on the
national market. Liberalization of world trade and capital flows made international
markets far more open to competition. The development of a knowledge-based
economy, supported by high technology inputs, made the sectoral industrial policy
goals of supporting traditional, aging, industries appear increasingly costly.
Modern industrial competitiveness policy focuses on the economy as a whole.
Initiatives designed to improve a nation’s business environment, streamlining or
eliminating some forms of regulation, reducing impediments to trade and investment
flows, and encouraging research and development have replaced targeted policies.
To the extent that subsidies are provided, they tend to be to encourage investment
in new markets, rather than investing to shore up declining industries.140
Other key parts of industrial competitiveness policy include the reform of
corporate structure and practices and corporate governance. These are important
elements in encouraging transparency in markets. Capital is less likely to flow
through markets where the perception exists that results are rigged, or the data
provided about firms’ financials are not accurate. In today’s market, the inability to
access capital is a significant liability to economic performance.
Conclusion and Outlook141
The first part of this report showed that, in terms of productivity and output, U.S.
manufacturing remained strong and competitive between 1991 and 2000. Its real
output has tripled over the past generation, and grew by 30% in the latter period,
which represents a peak-to-peak comparison. While there have been major
divergences among different industry sectors, such divergences may be regarded as
part of the process of transition and industrial transformation in the economy. The
139New Directions in Industrial Policy, OECD Policy Brief, No.3-1997, available at
http://www1.oecd.org/publications/Pol_brief/1997/9703_pol.htm (Viewed on September 29,
2003).
140Ibid., pp. 2-7.
141This section was written by Stephen Cooney.
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recent economic downturn may be regarded as essentially a cyclical event, in which
recovery has been impeded by some unique events, such as the 9/11 attacks and the
uncertainties of the Iraq war, and during which there are also present some elements
of structural change.
Among the industries studied in detail in this report, textiles and apparel have
demonstrated the most negative performance in terms of job loss, and the planned
termination of the remaining textile import quotas threaten even stronger
international competitive pressure on the industry. The information technology
products manufacturing industry, especially semiconductors, has, by contrast been
able to regain and maintain its overall global leadership position, though it has been
shedding jobs recently and faces future challenges. The automotive industry has
remained strong in the United States, though the domestic industry has changed
dramatically in structure and the U.S. trade balance in automotive products has
continued to worsen. The traditional “Big Three” domestic manufacturers (and one
of the Big Three is now controlled by a foreign-based company) have been
challenged by the growth of foreign-owned “transplant” production, especially in
passenger cars. Now Toyota and Nissan are also making inroads into the light truck
market.
Not only has the performance of different industries varied considerably, the
overall manufactures trade balance has moved sharply in a negative direction, at an
alarming rate according to some analysts. They note that it is the largest component
in the deterioration in the overall U.S. trade account. Manufactured imports are just
slightly down from their high of more than $1 trillion in recent years, and are now
50-60% higher annually than the level of exports. This development may be ascribed
in some degree to the high exchange rate of the dollar between 1996 and 2002, a
problem which could be alleviated by recent moderating trends. However, while
concern is often expressed about the trade deficit and “foreign outsourcing” of U.S.
manufacturing jobs, it is not often noted that manufacturing employment is declining
in virtually all major industrial countries, as well as many developing countries,
especially China.
Thus, decline in manufacturing employment is not a uniquely American or
“mature” industrial country phenomenon. It may be considered as part of the process
of global adjustment to new patterns of production, trade and the international
division of labor, encouraged by dramatic real-time industrial management changes
made possible by information technology advances and trade liberalization.
This is not encouraging to U.S. manufacturing workers who have lost their jobs,
to the communities where they live, and, in many cases, to their former employers
who may not be able to adapt to the new globally competitive environment. Since
1950, manufacturing employment has declined from 30% of all non-farm jobs to less
than 15%. Unionization levels have declined by similar levels since 1982, and have
fallen in all fields, except government employment. Today there are fewer than 15
million manufacturing workers in the United States, almost five million fewer than
the all-time peak in 1979, and fewer than in 1950. And measured as a share of
current-dollar U.S. GDP, manufacturing output has declined from about 30% to
about 15% since 1960.
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While this last statistic reflects the efficiency and productivity of U.S.-based
manufacturing, constant competitive pressures may be encouraging manufacturing
employers to cut their workforces or to move production to other locations. The
conclusion from this perspective is that manufacturing employment, like agriculture
before it, is declining relatively and absolutely in the United States, and more rapidly
in the last three years.
The view of the Bush Administration, as outlined in a September 2003 speech by
Secretary of Commerce Don Evans, is that the present market-based system, with
minimal government intervention in the economy, can be adjusted and reinforced at
certain points to provide an adequate response to actual or prospective losses of U.S.
competitiveness.142 As part of its investigation into the condition of U.S.
manufacturing, the Commerce Department conducted a total of 23 “roundtables”
with groups representing manufacturing sectors or specific topics of interest.143
Manufacturing in America summarizes in its second chapter what the Commerce
Department reports as those policy areas that manufacturers themselves believe
“require immediate attention ... to ensure the competitiveness of U.S.
manufacturing.”
The report says that manufacturers want, first, a greater “focus within government
on manufacturing and competitiveness.” That said, they reportedly also asked for
stronger policies to promote growth both at home and abroad. As part of the more
concentrated focus, the manufacturers were also said to ask for more assistance from
government in controlling costs that are coincidental to manufacturing, such as taxes,
health care costs, the costs of regulatory compliance, especially with respect to
environmental issues, and the costs of various liabilities faced by manufacturers.144
The manufacturers were also reported as urging greater government commitment to
encourage private sector research and development, as well as in bringing
innovations to market. More broadly, the report continues, “manufacturers seek a
renewed emphasis from all levels of government to invest in education and training
institutions.” Finally, the report emphasizes that manufacturers seek international
trade and monetary policies that create a “free, fair and open” competitive
environment. This means with respect both to opening foreign markets, and to
eliminating unfair competition from foreign producers abroad and in the domestic
U.S. market.145
142Secretary of Commerce Don Evans. "Remarks to the Detroit Economic Club," (Sept. 15,
2003).
143The “roundtables” were held between April and September 2003, and are listed, with
names of participants, in the appendix to Manufacturing in America.
144In addition to the Commerce Department report, a detailed analysis of the impact of such
issues, prepared for the Manufacturers Alliance and the Manufacturing Institute of the
National Association of Manufacturers, is in Jeremy A. Leonard, How Structural Costs
Imposed on U.S. Manufacturers Harm Workers and Threaten Competitiveness (December
2003).
145The input from the roundtables is summarized on pp. 33-34, with details elaborated in pp.
34-58 of Manufacturing in America.
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The last part of Manufacturing in America lays out recommendations for
addressing the challenges raised by U.S. manufacturers. These include making
recently approved tax relief measures permanent, and making permanent the tax
credit for research and development. It also includes controversial initiatives
supported by President Bush regarding class action lawsuits, medical liability,
pension reform and a national energy strategy. The report introduces some new
initiatives in federal support for private sector innovation and R&D, of which the
most concrete is greater Commerce Department coordination with the established
Manufacturing Extension Partnership (MEP).146 These initiatives include a review
of existing federal programs that invest in manufacturing R&D to “establish priorities
designed to improve U.S. manufacturing technology.” Reflecting the interest
expressed by manufacturers in education and training, there is also a section in the
recommendations proposing increased federal support and coordination of technical
training at the high school and postsecondary levels, plus review and enhancement
of training for workers, and retraining for those who have been displaced from their
jobs. Finally, the report emphasizes the opening of international markets through
future trade agreements, as well as tougher enforcement of U.S. trade laws.147
The report specifically proposes a reorganization and strengthening of the
Commerce Department’s international functions to strengthen both export promotion
and enforcement policy against unfairly traded imports.148 It also proposes creation
of the position of “Assistant Secretary for Manufacturing and Services,” who would
be “the principal point of contact with the manufacturing sector” and would assist the
Secretary of Commerce “in his role as the federal government’s chief advocate for
the manufacturing sector.” The position, assisted by a new Office of Industry
Analysis, would have the task of initiating a “benchmark” evaluation of the U.S.
manufacturing environment, including all policies and regulations that affect
manufacturing. Moreover, the report recommends establishment of a “President’s
Manufacturing Council” by Congress, to be chaired by the Secretary of Commerce,
with the task of oversight of the initiatives in the report. The report also recommends
an interagency coordinating group, again to be chaired by the Secretary of
Commerce, to oversee implementation of the recommendations and to develop new
initiatives.149
The view of the Commerce Department is that it already has the legal authority
to establish an Assistant Secretary of Manufacturing. The FY 2004 consolidated
appropriations bill, which was signed into law on January 23, 2004, contains the
budgetary reprogramming authority, which the Commerce Department believes
146For more information on the MEPs, see CRS Report 97-104, Manufacturing Extension
Partnership Program: An Overview.
147These recommendations are discussed in ibid., pp. 62-79. The list of recommendations
are also summarized under “Recommendations” in the summary under the Commerce
Department website (www.commerce.gov).
148Ibid., pp. 77-79.
149Ibid., pp. 60-61.
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necessary to create this position and to undertake related organizational changes
proposed in its manufacturing report.150
Congress is also considering tax policy changes that may have important
consequences for U.S. manufacturing. The WTO has declared both the former U.S.
system of “Foreign Sales Corporations” and its replacement by an extraterritorial
income (ETI) provision of the tax code as illegal export subsidies. The European
Union has received authorization for imposing retaliatory tariffs against more than
$4 billion in U.S. exports, if the law is not changed. This threat has created both a
crisis and an opportunity to revisit the U.S. tax code, and to consider WTO-compliant
means of changing the code to more broadly assist U.S. manufacturing companies.151
On other issues, Congress approved, and President Bush signed into law, the Trade
Act of 2002 (P.L. 107-210), which expanded and enhanced assistance through the
Trade Adjustment Assistance program to workers dislocated by import
competition.152
U.S. manufacturing may, however, be affected by more than cyclical problems
or the types of international and domestic issues addressed in the Commerce
Department recommendations and related legislative measures. The secular decline
in manufacturing employment, the inability of the economy to generate new
manufacturing jobs in the early stages of the last two U.S. domestic economic
recoveries, and the growth of a huge and possibly permanent manufactures trade
deficit could be caused by many factors. These could include a mismatch between
the skills, abilities and education of workers leaving one industry and those required
by another. There may also be a reluctance of workers to move from one
geographical region to another, or to embark on an entirely new career at an older
age.
The economist Joseph Stiglitz has described unemployment and under-utilization
of industrial capacity as “perhaps the most widely recognized symptoms of ‘market
failure.’” As Stiglitz then continues, so-called “market failure” may occur for a
variety of reasons. “The fact that markets have failed to produce full employment ...
does not in itself imply that there is a role for the government to play; one must be
able to show, in addition, that there are policies through which the government can
improve the functioning of the economy.”153
In the context of U.S. manufacturing, this may be considered by some to justify
a more active government role in the economy than contemplated by the Bush
150Interview with Deputy Assistant Secretary of Commerce for Legislative and
Intergovernmental Affairs Brett Palmer, January 23, 2004. See “Operations and
Administration” provisions in Division B, Title II.
151CRS Report RL32103, Comparison of Tax Incentives for Domestic Manufacturing in
Current Legislative Proposals, by Jane Gravelle, discusses this issue in detail.
152TAA is summarized in CRS Report 94-478, Trade Adjustment Assistance for Workers:
A Fact Sheet, by Paul J. Graney.
153Joseph E. Stiglitz, Economics of the Public Sector (New York: W.W. Norton & Co.,
1986), pp. 83-95. The quotations are from p. 91.
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Administration.154 For example, proposals have included more far-reaching efforts
to improve worker skills, to promote manufacturing innovation through increased
private-public sector partnerships, to restore and develop public infrastructure and
to encourage domestic manufacturing activities considered strategic, for reasons of
national security or national economic development. But proposals of this type also
imply other costs, both in terms of direct expenditures and the indirect reallocation
of resources. Such efforts can support manufacturing, but possibly at the expense of
the overall economy.
Appendix: Change in Industrial Classification
System155
The Standard Industrial Classification (SIC) system provided the structure for
categorizing, collecting, aggregating, presenting, and analyzing data on the U.S.
economy on a logical and systematic basis since before World War II and until
recently. It was replaced by the North American Industrial Classification System
(NAICS) effective October 1, 2000.
The development of NAICS grew out of (a) realization that the SIC had become
outdated, and (b) negotiations for the North American Free Trade Agreement,156
when it was found that comparable industry classification systems would be
necessary for the three signatory countries – Canada, Mexico, and the United States.
Under the SIC, establishments were classified according to the primary product
or group of products they produce or handle, or the primary service they provide. In
addition, many industries now prominent – such as computer and software
production – of course either did not exist or constituted an insignificant part of the
economy. The NAICS classifies according to the activity that an establishment is
primarily engaged in; establishments using similar raw materials, capital equipment,
and labor are classified together. In addition, the NAICS reorganizes the structure
of the SIC to reflect the current structure of the U.S. economy, including the
introduction of new industry or sector categories – such as computer and software
manufacture and “Information” (which includes publishing, motion picture and
sound recording, broadcasting, telecommunications, information services, and data
processing).
October 1, 2000, was the first date that data began to be collected according to
the NAICS structure. Unavoidably, the switch is resulting in breaks in comparability
– some substantial – in time series between the SIC and the NAICS periods. Some
federal government data collecting and/or publishing agencies have begun to revise
154Congress has frequently considered “countercyclical” programs to create jobs during
recessions, but has enacted no such major programs since 1983; see CRS Report RL31138,
Countercyclical Job Creation Programs of the Post-World War II Era, by Linda Levine.
155The appendix was written by Bernard A. Gelb.
156The North American Free Trade Agreement was signed in 1993, and went into effect
January 1, 1994.
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their SIC-based series in order to produce complete comparable series. At this
writing, this large undertaking is far from complete in most cases, and thus
necessitates the use of the SIC-based series when an analyst wishes to examine trends
of a number of years ago.