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“Free Trade Has Destroyed American Manufacturing.”

Written by Gary North on November 7, 2015

This criticism of free trade is wrong.

To understand why it is wrong, first consider this chart of the per capita output of American manufacturing. It is not a chart that most Americans have ever seen. Economist Mark Perry has provided it.

ManufacturingOutput

He also provides another chart that shows manufacturing output in the five major manufacturing nations.

ManufacturingChartWorldPerry

American manufacturing is a remarkable success. Yet it flourishes within a low-tariff/sales tax framework. It gets more efficient. Firms hire fewer workers to maintain their productivity. That is what efficiency is all about: a reduction in the the price of inputs for any level of output.

Nevertheless, there are never-ending demands from protectionists, who want the federal government to impose sales taxes on imported goods. These demands go back to 17th-century mercantilism. They believe that higher taxes promote economic prosperity. Politically conservative protectionists know that their call for higher taxes will be resisted by other political conservatives, so they do not call these sales taxes “sales taxes”. They call them tariffs. By concealing the economic growth-reducing nature of these sales taxes behind a politically and traditionally acceptable word, they gain support from conservatives who have never studied free market economics, beginning with their complete ignorance about Adam Smith’s anti-mercantilist book, Wealth of Nations (1776).

Here is what protectionists focus on: only about 10% of the American economy is based on manufacturing.

To understand the importance — meaning unimportance — of this statistic, look at this chart. It is posted here.

LaborForce1840

The chart overestimates employment in manufacturing. The actual figure is closer to 8% than 20%. The combined percentage of manufacturing, construction, and mining is about 12.6%, according to the Bureau of Labor Statistics. This is expected to fall to 12% in 2022.

What is significant about this chart is this: the service sector has been larger than the manufacturing sector ever since 1840. What we see today is nothing new.

The biggest decline has been in agricultural employment. It has almost disappeared. But we do not worry about this, do we? The “heart of America” was agriculture in 1840: almost 70%. Now it is at 2%. Nobody cares. Output is high. Our farms export grains. The huge increase in productivity has displaced workers, beginning with the reaper in the 1840’s. This is a good thing. It has happened all over Western civilization and Japan. It is now happening in China and India. This is a mark of increased wealth. Fewer workers are required to feed us city slickers.

What about the value of output? Services make us richer. Compare today with 1948.
Output1948

Is America richer today than in 1948? In every sector, it is. In anything digital/electronic, our wealth is incomparably greater. I could barely function today if information costs were as high as they were in 1970, let alone 1948. I would have to live close to a major research library.

Think of your life. To what extent do you derive your lifestyle from manufactured products? Not much. Estimate this in terms of hours spent per day. Your tools are mostly digital. You car, your home, and your appliances are your most obvious manufactured products. How often do you buy a replacement appliance? Once a decade? Are they cheap in terms of your income? Far cheaper than would have been true in 1948.

In those areas of life that are low value — manufactured goods — Americans have become increasingly dependent on imported goods. This is not true in high-value areas of life: services.

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