Facing the Dragon: Prospects for U.S. Manufacturers in the Coming Decade¨

Andrew B. Bernard, J. Bradford Jensen, and Peter K. Schott*

May, 2004

Overview: Will everything be “Made in China” by 2011?

The large and growing trade deficit between the United States and China, the significant wage differential between Chinese and American manufacturing workers, and the loss of 2.7 million jobs in the U.S. manufacturing sector over the past three years have led to the fear in some quarters that the U.S. manufacturing sector is (increasingly) being relocated to China. Pundits proclaim the imminent end of U.S. manufacturing.

The purpose of this paper is to go beyond this uninformed hyperbole and assess the long-run prospects for U.S. manufacturing – as a whole and by industry – in the coming decade.[1] Our analysis shows that competition from low-wage countries like China leads over time to a reallocation within U.S. manufacturing: high-wage, high-skill industries where the U.S. has comparative advantage attract resources and grow; low-wage, low-skill industries decline.

We have three goals. The first is to demonstrate that not all U.S. manufacturing industries have attracted the same degree of low-wage country import competition over the past thirty years. The second is to forecast which industries will experience the greatest increase in competition from low-wage countries between now and 2011. Finally, we highlight the oft-ignored fact that low-wage country competition creates winners as well as losers in terms of employment growth and output.[2]

To summarize our key findings:

· Import penetration from low-wage countries is accelerating: The share of U.S. manufacturing imports originating in China and other very low-wage countries increased between 1981 and 2001, from 4% to 15%. Our forecast, based on current product-market entry by low-wage countries, indicates that increases in this share will accelerate, to 24%, by 2011.

· The industries most at risk are low-skill, low-wage and employ relatively few workers: Imports from low-wage countries have been, and will continue to be, concentrated in low-wage, low-skill, labor-intensive sectors like Apparel and Footwear. It is important to note that these sectors employ relatively few workers compared to industries where the U.S. retains comparative advantage.

· The industries least at risk are high-skill, high-wage: Industries consistent with U.S. comparative advantage – i.e. industries that are skill-intensive and pay above average wages – will continue to outperform. Even within industries that face high levels of low-wage competition, some firms will survive and thrive by adjusting their mix of products.

· Reallocation, reallocation, reallocation: Industries with relatively little competition from low-wage countries saw employment increase an average of 2.3% per decade over the past thirty years. By contrast, industries facing the highest levels of low-wage country competition experienced employment declines averaging 12% per decade. The net result of these trends is a reallocation of U.S. manufacturing towards U.S. comparative advantage. Competition from low-wage countries has fostered the growth of high-wage, high-skill and high-productivity industries and has hastened the decline of uncompetitive sectors.

The Past: Which industries did low-wage countries enter over the last twenty years?

U.S. imports of goods and services have increased rapidly over the past 20 years from $319B in 1981 to $1,437B in 2001 (2000$), accounting for 6.0% of GDP in 1981 and 14.6% in 2001.

Even as total imports have increased faster than GDP, imports originating in low-wage countries have grown more rapidly than overall imports. As illustrated in Figure 1, the share of U.S. imports from the world’s poorest countries increased sharply in the mid-1980s, rising from 4% in 1981 to 15% in 2001.[3]

Figure 1: U.S. Manufacturing Imports from Low-Wage Countries

Notes: Figure displays actual and forecast share of the value of U.S. imports originating in low-wage countries from 1972 to 2011. Countries are classified as low wage if their per capita GDP is less than 5% of U.S. per capita GDP on average between 1972 and 2001.

There is little chance that this re-orientation of U.S. imports towards relatively low-wage countries will stop or reverse itself. Indeed, our forecast indicates that roughly one quarter of U.S. imports will originate in the word’s poorest countries by 2011. Figure 1 extends the import-share trend to incorporate this forecast for the coming decade.

The surge in imports from low-wage countries starting in the 1980s is driven largely by China. This trend can be seen in Figure 2, which provides a breakdown of total U.S. imports by source in 1981 and 2001. As indicated in the figure, China accounted for less than 1% of U.S. manufacturing imports in 1981 but more than 10% of U.S. manufacturing imports by 2001. The overall low-wage country shares displayed in the pie charts match those displayed in Figure 1.

Figure 2: A Breakdown of U.S. Imports in 1981 and 2001

Notes: Figure displays share of U.S. manufacturing imports originating in low-wage countries and China in 1981 and 2001.

The aggregate increase in low-wage country import shares shown in Figure 1 has not been uniform across industries. Some sectors, such as Transportation and Chemicals, have faced relatively little low-wage country competition, while others, for example Apparel and Leather goods, have attracted much more. A breakdown of manufacturing exposure, by industry at ten-year intervals beginning in 1972, is reported in Table 1.

The key message of Table 1 is that stark differences in industry exposure to low-wage competition persist over time. In 1981, several years before the surge in aggregate exposure noted in Figure 1, three industries faced exposure greater than 10% while exposure was less than 2% in nine others. The high-to-low range of exposure was 21 percentage points. Twenty years later, in 2001, similarly sharp differences remained: seven sectors have low-wage import shares greater than 20%, while six others have exposure less than 10%. Moreover, the high-to-low range of exposure increased to 60 percentage points.

Table 1: U.S. Exposure to Low-Wage Country
Competition by Industry, 1972 to 2001

Percent of Imports from Low-Wage Countries by U.S. Manufacturing Industry, 1972-2001
Industry	1972	1981	1991	2001
20 Food	11	11	8	8
22 Textile	25	21	19	22
23 Apparel	3	15	30	41
24 Lumber & Wood Products	4	8	12	10
25 Furniture	1	7	7	33
26 Paper	0	0	1	7
27 Printing	0	1	4	19
28 Chemicals	2	7	3	4
29 Petroleum	1	8	5	7
30 Plastic & Rubber Products	0	1	19	30
31 Leather Goods	2	5	28	61
32 Stone & Concrete Products	1	2	7	22
33 Primary Metal	1	4	3	6
34 Fabricated Metal	1	2	6	17
35 Industrial Machinery	0	1	1	12
36 Electronics	0	2	7	18
37 Transportation Equipment	0	0	0	1
38 Instruments and Controls	0	1	3	9
39 Miscellaneous (E.g. Toys, Jewelry)	3	7	25	43
All Manufacturing	2	4	7	15
Notes: Industry identifiers are preceded by their two-digit Standard Industrial Classification (SIC) code. Each cell reports the percent of industry imports originating in countries with less than 5% of U.S. per capita GDP.

The growing exposure gap within manufacturing indicates that not every industry is heading toward the same fate. Between 1981 and 2001, for example, Leather Goods experienced the largest increase in exposure to low-wage competition, as the low-wage import share grew from 5% to 61%. Other industries with large rises include Apparel, Plastic & Rubber Products (e.g. gaskets, hoses, and pipes), and Miscellaneous Products (which includes toys). In contrast, Transportation, Chemicals, and Instruments and Controls experienced much more muted increases in exposure, such that it was still in the single digits by 2001. As we discuss in further detail below, a critical factor in determining the level of exposure to low-wage competition that an industry will face is the level of technological sophistication. High-wage, capital-using, and skill-intensive industries will continue to attract fewer imports from low-wage countries than low-wage, labor-intensive industries.

The Future: How will competition from low-wage countries change from 2001 to 2011?

Knowing which industries are likely to experience the largest gains in low-wage country imports in the coming decade is of crucial importance for both managers and policymakers. As we discuss below, both employment and production growth are substantially lower in industries facing the highest levels of low-wage country competition. We are able to forecast changes in industry exposure to low-wage country imports over the coming decade using detailed data on product market penetration and industry characteristics. Our research reveals a lag between low-wage countries initially entering a product market and their subsequent increase in market share. By looking at the product markets that low-wage countries are entering in 2001, we can make a reliable forecast of where volumes will likely grow between 2001 and 2011.

Figure 3: Low-Wage Countries First Establish a
Beachhead and Later Gain Market Share

Notes: Product penetration is the number of products imported from at least one low wage country divided by the total number of products imported each year. Value penetration is the total value of low-wage country imports divided by the total value of imports.

Figure 3 captures the lag between initial product-market penetration and subsequent market share increases for U.S. manufacturing as a whole. The range of products exported from low-wage countries started to increase sharply in the late 1970s, while the actual value of goods shipped from low-wage countries did not begin to rise significantly until a decade later. It is precisely this leading indicator of low-wage imports that we exploit – at the industry level – to forecast future low-wage competition within U.S. manufacturing.

The empirical model we develop suggests that current market share, current product penetration, and industry capital and skill intensity are useful predictors of future import share levels. Using this empirical model, we forecast future levels of low-wage imports.

Table 2: Forecasted Change in U.S. Exposure to
Low-Wage Country Imports, 2001 to 2011

	Percent of Imports from Low-Wage Countries			U.S. Employment Share	U.S. Average Hourly Wage
Manufacturing Industry	2001	2011	Change	2001	2001
31 Leather Goods	61	87	26	0.3	$10
23 Apparel	41	67	25	3.2	$9
25 Furniture	33	57	24	2.9	$12
39 Misc (E.g Toys, Jewelry)	43	65	22	2.1	$12
32 Stone & Concrete Products	22	36	14	3.2	$15
34 Fabricated Metal	17	30	13	8.4	$14
27 Printing	19	31	13	8.4	$15
30 Plastic & Rubber Products	30	42	12	5.4	$13
22 Textile	22	32	10	2.7	$11
36 Electronics	18	28	10	9.2	$14
24 Lumber & Wood Products	10	19	8	4.4	$12
26 Paper	7	14	7	3.6	$16
35 Industrial Machinery	12	19	6	11.4	$16
38 Instruments and Controls	9	15	6	4.7	$15
37 Transportation Equipment	1	4	3	9.9	$19
20 Food	8	11	3	9.6	$13
28 Chemicals	4	7	2	5.8	$18
33 Primary Metal	6	7