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Guest Contribution: “The Trade War Has Cost 175,000 Manufacturing Jobs and Counting”

Summary:
Today, we are pleased to present a guest contribution written by Lydia Cox (Harvard University) and Kadee Russ (University of California, Davis), both formerly on the staff of the Council of Economic Advisers. A study released in December by Aaron Flaaen and Justin Pierce, two highly respected experts in trade and labor markets, was widely covered  in the press. “Trump Tariffs led to job losses, higher prices for businesses,” was the most succinct and comprehensive among the article titles. Some of the coverage noted the statistic in Footnote 10 on page 19 of the Flaaen and Pierce study: By mid-2019, manufacturing employment ended up 1.4 percent lower than would have been the case without the tariffs levied in 2018-2019, likely due to a combination of increased costs of production and

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Today, we are pleased to present a guest contribution written by Lydia Cox (Harvard University) and Kadee Russ (University of California, Davis), both formerly on the staff of the Council of Economic Advisers.


A study released in December by Aaron Flaaen and Justin Pierce, two highly respected experts in trade and labor markets, was widely covered  in the press. “Trump Tariffs led to job losses, higher prices for businesses,” was the most succinct and comprehensive among the article titles.

Some of the coverage noted the statistic in Footnote 10 on page 19 of the Flaaen and Pierce study: By mid-2019, manufacturing employment ended up 1.4 percent lower than would have been the case without the tariffs levied in 2018-2019, likely due to a combination of increased costs of production and retaliatory tariffs. Yet it was hard to find in the articles an articulation of how many jobs this represents in level terms.

Exactly how many jobs is 1.4 percent of pre-trade-war manufacturing employment? Take 1.4 percent of 12.5 million, the number of manufacturing jobs at the end of January 2017, the month before the trade war began. The answer is 175,000 manufacturing jobs missing by mid-2019. Flaaen and Pierce’s study suggests that increased costs for imported inputs account for about two thirds of the total reduction in manufacturing employment. Retaliatory tariffs account for the remaining third.

In fact, more than 175,000 jobs disappeared: this figure nets out the roughly 40,000 jobs that may have been added or protected in industries benefitting from tariff protection. Furthermore, the estimate captures the decline in manufacturing employment only through mid-2019, but the tariffs have remained in place for a year since that time, likely leading to additional losses.

Digging a little deeper, we see evidence in Figure B5a that within this number, about 75,000 of these missing manufacturing jobs (about 0.6 percent of  manufacturing employment, once we weight by the average cost share of steel) are associated with the Section 232 tariffs on steel and aluminum that went into effect in March 2018. A potential positive impact on employment from import protection is much smaller and not significantly different from zero. The steel and aluminum tariffs plausibly may have led to an increase of 1,000 jobs in these industries and kept a few thousand more from disappearing. See our Econofact memo for more on this.

Flaaen and Pierce’s study design filters out effects of macroeconomic conditions like variation in the value of the dollar and changes in economic growth overseas. By doing so it can plausibly be seen as a conservative estimate if the escalating tariff war led to the dollar strengthening against some currencies or dampened global growth, as downward revisions in growth forecasts by the IMF and OECD have suggested. Moreover, the estimate of 175,000 missing manufacturing jobs does not include adverse effects on employment that may have occurred due to the way that trade policy uncertainty dampened investment and industrial production during that period across many countries, according to macroeconomists Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo.

In addition to job losses, tariffs create a burden on households in the form of higher prices on goods and the inconvenience of having to substitute away from goods targeted by tariffs. Estimates assess the costs of the trade war from January 2018 to June 2019 at about $800 per household. Considering the macroeconomic effects of the trade policy uncertainty more than doubles this figure.  The study by Caldara, Iacoviello, Molligo, Prestipino, and Raffo captures the overall impact of the trade war during that period, including trade policy uncertainty and attendant effects on national output through its adverse impact on investment and industrial production. They estimate that the trade war caused the U.S. economy be 1 percent smaller in 2020 than it would have been without the tariffs, equating to an average cost of $1700 per household. See this Econofact memo for a comparison and discussion of overall costs of the trade war, or more on the macroeconomic impacts of unilateralism here.


This post written by Lydia Cox and Kadee Russ.

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

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