In the US presidential elections 2024, there’s a lot of talk about “bringing those factories back” after they’ve been “outsourced” to Mexiko or “offshored” to China. Watching this from Zurich, Switzerland, it’s disheartening to see how there’s next to no factual basis for the debate.
So I made myself the ultimate cheat-sheet for this discussion, including:
- Jobs in US manufacturing (US Bureau of Labor Statistics)
- Economic recessions (Source)
- Presidents and trade agreements that are often mentioned (NAFTA and granting China permanent normal trade relations)
With this, then, let’s observe that throughout this timeline, economic recessions are what leads to drops in manufacturing. Also, if you care about US manufacturing, you’ll probably have an opinion about why a third of manufacturing jobs were lost in the 2000s, none of which came back under Bush and only a few under Obama.
I don’t have a fixed opinion, but I’m aware there’s roughly two positions:
- Those I sympathise with say something along the lines: It’s mainly just the US entering the post-industrial phase, just like all other countries.
- Another group points to free trade policies with Mexico (1993 NAFTA) and China (2000 permanent normal trade relations).
I’ll briefly expound why I sympathise with the former and doubt the latter.
Phases of economic development
One of the oldest and best macroeconomic development models is the three-sector model by the French economist and policymaker Jean Fourastié. It’s good because it explains a lot with very little.
Fourastié published his book “Le Grand Espoir du XXe siècle” (The Great Hope of the Twentieth Century) in 1949. In it, he predicted the economic growth of the “Trente Glorieuses” (the Glorious Thirty years of post-WWII growth), the subsequent fall of employment in manufacturing, and rise of services.
He argued that when looking at the three sectors of the economy (agriculture, industry and services), economic growth would necessarily lead to shifts in employment between the sectors. Here’s an illustration and a description of his model.
Pre-industrial phase
In pre-industrial societies, the vast majority (roughly 80-90%) worked in agriculture. Think about this in terms of productivity: To feed 100 people, at least 80 people had to toil the fields.
Industrial phase
As industrialisation took off in the late 18th and 19th century, crop yields improved thanks to mechanisation, specialisation and, later, fertilizers. Today, we produce more food than ever, but only 1-2 percent of us work in agriculture. To feed 100 people, only 1 or 2 people are required (mostly to steer machines).
Simultaneously, factories attracted employment, predominantly in the cities. A sizable share of the population now worked in those factories, constituting the working class who sold their labour to the capitalists owning the factories. Workers organised and bargained for better working conditions, better pay, sick leave, vacation, etc. That’s the origin of the classical left-wing movements.
Post-industrial phase
Following Fourastié, the root causes that reduce the demand for industrial labour are productivity gains achieved by rationalisation and automation. Just like with agriculture, fewer and fewer workers are required to produce more and more output. These forces, Fourastié thought, would continuously shift employment away from the industrial sector.
In the second half of the 20th century, the West indeed entered the post-industrial phase. This isn’t happening in one country because of some policy, it’s happening across Western countries. Here are two historical charts of countries that show this empirically for the United States and for Switzerland:
In this Excel-Sheet I visualized data from the OECD. Notice the decline of industrial employment in all of them, like in the United States and Switzerland above. (Sadly, a lot of data is incomplete.)
The question is what role the offshoring of jobs to China played in this. I’ll continue this another day… If you like it so far and have some feedback, you can contact me here on X.