Donald Trump’s attack on trade, if carried out as President, would be an economic disaster. Connections with the global economy enable the free flow of goods, services, ideas, data and people across national borders.. Countries that make use of those connections have prospered, while countries that have engaged in protectionism have stagnated. We believe that trade agreements such as TTIP and TPP are essential to global growth.
Nevertheless, we must acknowledge that the process of globalization has produced much more turbulence than expected. When the United States concluded the trade deals of the 1990s, most economists expected that advanced countries would continue to climb the technological and productivity ladder, creating space on the lower rungs for countries such as China and India. Meanwhile American workers were supposed to reap the benefits of innovation and productivity gains in the United States.
This assumption turned out to be only half true. The US excelled in the digital sphere, creating new companies, new industries, and millions of new jobs.
However, innovation has faltered in physical industries such as manufacturing. Take a look at the table below, which shows multifactor productivity growth in manufacturing since 1994, when GATT was approved.
| Multifactor productivity growth (1994-2014) | |
| average annual percentage change | |
| Computer and electronic products | 7.9% |
| Printing | 1.2% |
| Petroleum | 1.0% |
| Textiles | 0.7% |
| Miscellaneous (including toys and medical equipment) | 0.6% |
| Transportation equipment | 0.5% |
| Plastic and rubber | 0.4% |
| Wood products | 0.1% |
| Primary metals | 0.1% |
| Nonmetallic minerals | -0.1% |
| Machinery | -0.2% |
| Furniture | -0.3% |
| Fabricated Metal Products | -0.3% |
| Food, beverage, and tobacco | -0.4% |
| Paper products | -0.6% |
| Electrical equipment | -0.6% |
| Chemical products | -0.7% |
| Apparel and leather | -2.2% |
Since 1994, multifactor productivity has actually fallen in 9 out of 18 manufacturing industries, and has barely risen in another 4 manufacturing industries. The only industry with significant productivity growth over the past 20 years is computer and electronic products.
So no wonder manufacturing has lost so many jobs! Without productivity growth, US manufacturing workers got stuck on the lower rung and had to fight for space with much lower paid workers overseas.
Indeed, the narrative that job loss in manufacturing is due to higher levels of productivity is fundamentally wrong and unsupported by the data. Rather, the lack of productivity growth has exposed U.S. manufacturing workers to foreign competition.
What we need, to create good jobs in industries such as manufacturing, is not more protection but more investment in information technology and more innovation. This innovation is coming, as technological change and the Internet of Things transform physical industries.
What’s more, as Internet connectivity increases, and industries such as manufacturing begin to catch up in their use of information technology, there’s a fantastic opportunity for smaller communities to prosper. The key is good policy at the local level. Cherry pick the best ideas from around the world, while promoting connections between local sectors. For example, additive manufacturing potentially allows cost-effective production at a much smaller scale, while drawing on local designers selling through global websites such as Etsy, eBay, and Amazon.
Within the same country or region, some local areas can prosper while others fall behind. We see that in Britain, where the fortunes of London, and to some extent, Scotland, have diverged from the rest in the country. We see this in the United States, where mayors and other local officials have become increasingly important in setting the course that can help their localities succeed or fail.
As our own small contribution, PPI has been developing cutting edge analytic tools to help local areas identify their points of strength. We’ve looked at the contribution of the tech/info sector at the county level, and the jobs generated by the App Economy at the country, state, city level around the world.
There’s no way America can unplug from a connected world without turning our back on tech innovation and rising living standards. US communities need to figure out how to best use new technologies to carve out niches in world markets.
