28 December 2019   Leave a comment

The US Federal Reserve has released a research paper which analyzes the effects of the tariff increases in the US on the manufacturing sector in the domestic economy. The tariffs were justified as an effort to “level the playing field” for manufacturers who suffered from unfair trade practices in China. There is little question that the manufacturing sector in the US has been substantially reduced because many firms stopped producing in the US and moved their facilities abroad in search of lower labor costs and more relaxed environmental regulations. According to the US Department of Labor:

“Today’s manufacturing output is at least 5 percent greater than it was in 2000, but it has become much more capital intensive and much less labor intensive. Accordingly, workers in the sector are more likely to have at least some college education than their counterparts of years past. But there are far fewer manufacturing workers overall, with about 7.5 million jobs lost since 1980. These job losses have likely contributed to the declining labor force participation rate of prime age (between the ages of 21 and 55) U.S. workers. In “The transformation of manufacturing and the decline of U.S. employment,” (National Bureau of Economic Research, Working Paper 24468, March 2018), economists Kerwin Kofi Charles, Erik Hurst, and Mariel Schwartz examine the factors that have played a role in the decline of prime age manufacturing workers since 1980 and focusing in the 2000s.

“Before examining the factors that have led to job losses, the authors discuss two periods that saw manufacturing employment fall sharply—1980 to 2000 and 2000 to 2017. Two million jobs were lost between 1980 and 2000 and 5.5 million jobs were lost between 2000 and 2017. The authors note that these losses have affected the employment rates of prime age workers, finding that a ’10 percentage point decline in the local manufacturing share reduced local employment rates by 3.7 percentage points for prime age men and 2.7 percentage points for prime age women.'”

The new research indicates that the tariff increases have not had the desired effect and that they have in fact damaged the manufacturing sector. The abstract to the paper summarizes the findings:

“Since the beginning of 2018, the United States has undertaken unprecedented tariff increases, with one goal of these actions being to boost the manufacturing sector. In this paper, we estimate the effect of the tariffs—including retaliatory tariffs by U.S. trading partners—on manufacturing employment, output, and producer prices. A key feature of our analysis is accounting for the multiple ways that tariffs might affect the manufacturing sector, including providing protection for domestic industries, raising costs for imported inputs, and harming competitiveness in overseas markets due to retaliatory tariffs. We find that U.S. manufacturing industries more exposed to tariff increases experience relative reductions in employment as a positive effect from import protection is offset by larger negative effects from rising input costs and retaliatory tariffs. Higher tariffs are also associated with relative increases in producer prices via rising input costs.”

The conclusion is not surprising to those who have studied the patterns of trade in the context of globalization. The manufacturers who were targeted by the tariffs simply shifted their production to countries who were not affected by the tariffs, e,g., from China to Vietnam. In the short run, the trade war between the US and China has made things worse, not better. In the US the tariffs have reduced manufacturing employment and raised prices.

Russia claims to have deployed the first hypersonic missile. A hypersonic missile flies at least 5 times the speed of sound and the Russian version, known as Avangard, also claims to be maneuverable. It is difficult to assess the truth of these claims, but, if true, such missiles would render anti-missile systems obsolete. Since the Reagan Administration, the US has been developing anti-missile systems and the Russians feared such systems, believing that anti-missile systems would nullify their nuclear weapons. Hypersonic missiles could potentially make the US investments in anti-missile systems a wasted effort. Both the US and China are also developing hypersonic missiles and we can expect that a new arms race will unfold. The US left the Intermediate-range Nuclear Force Treaty this year, and the only remaining arms control treaty still in force, START 2, will expire in February 2021.

Posted December 28, 2019 by vferraro1971 in World Politics

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