Trends in Trade Deficits and Manufacturing Employment

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Over the past few decades, the U.S. trade deficit has risen, and employment in U.S. manufacturing has declined. A recent Economic Synopses essay examined what is behind these trends.

Assistant Vice President and Economist Yi Wen and Research Associate Brian Reinbold first discussed why the U.S. seems to always run a trade deficit. They said that after the Bretton Woods system collapsed in the early 1970s, the U.S. dollar became the most widely used currency and the most popular foreign reserve along with U.S. government securities.

They explained that the collapse of Bretton Woods and the worldwide use of the U.S. dollar as a medium of exchange and a store of value have given the U.S. the ability to purchase goods from the world market by issuing debt, for instance.

“As a result, the United States is more likely to run trade deficits,” Wen and Reinbold wrote. “Indeed, just a few years after the Bretton Woods system ended, the U.S. trade balance started to show persistent and growing deficits—still seen today.”

(For a figure showing these trends, see the Economic Synopses essay “Understanding the Trade Imbalance and Employment Decline in U.S. Manufacturing.”)

Trade deficits imply that the level of national saving is insufficient to finance the level of national investment, they said. They added that the gap between saving and investment started increasing in the early 1970s, and the total gap (or the total cumulative trade deficit) reached about $11 trillion in 2017.

“Foreign countries fund this debt by trading goods for U.S. securities, making the United States the largest debtor in the world,” they wrote. “In other words, the United States is able to consume more goods than it produces and finance its investments by borrowing from foreign countries.”

The top U.S. creditors have changed over the years. Wen and Reinbold noted that countries such as Germany and Japan were initially the primary creditors, but the emerging Asian Tigers became the primary creditors by the early 1980s.

They pointed out that the East Asian and Pacific region accounted for more than 80 percent of the total U.S. goods trade deficit in 1991. But that has declined and is currently about 65 percent.

The authors added that Asia’s share of this deficit has declined despite China’s rise as the largest U.S. creditor. They noted that China’s share of the total U.S. goods trade deficit rose from about 15 percent in 1991 to 45 percent around 2016.

Wen and Reinbold also examined whether trade deficits are responsible for the decline of U.S. manufacturing employment. They attributed this decline largely to the rise in labor productivity in the goods manufacturing sector after World War II.

“This rapidly rising productivity freed up manufacturing labor to move to the service sector and caused labor-intensive goods-producing firms to relocate abroad,” they wrote. “This process inevitably reduced U.S. manufacturing employment.”

They cited research which found that this rapidly rising productivity produced 85 percent of the employment decline in the goods manufacturing sector, while the rising U.S. trade deficit accounted for the other 15 percent.¹

¹ See Kehoe, Timothy J.; Ruhl, Kim J.; and Steinberg, Joseph B. “Global Imbalances and Structural Change in the United States.” Journal of Political Economy, April 2018, Vol. 126, No. 2, pp. 761-96.

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