Manufacturing job loss: the consequences of malign neglect of the dollar and Chinese overcapacity

Today’s jobs report from the BLS showed that the U.S. manufacturing sector lost 14,000 jobs in August and has now lost 57,000 jobs since January of this year. This job loss is, in part, a consequence of the sharp rise of the dollar in 2014 and 2015, which has gained nearly 20 percent on a broad, trade-weighted basis, as shown below. The rising dollar has reduced the cost of imports, increased the cost of U.S. exports resulting in growing trade deficits. Growing exports support U.S. employment, but growing imports cost U.S. jobs, so the manufacturing decline was entirely predictable from the expected increase in the U.S. trade deficit, which responds to changes in the dollar with a lag of one to two years. Yet the U.S. government continues to do nothing about destructive exchange rate movements, whether they are caused by intentional currency manipulation or more recent, market-driven misalignments.

Data for the U.S. trade deficit in July were also released this morning. The trade deficit in manufactured products (Exhibit 1S) increased 3.1 percent, year to date, relative to the same period last year, despite a decline in the overall U.S. trade deficit. U.S. imports of petroleum products declined sharply in this period, while the trade deficit in non-petroleum goods (which is dominated by trade in manufactures) increased sharply. The single largest cause of the growing manufacturing trade deficit is malign neglect of currency manipulation over the past 20 years by the U.S. government.

China, which has been the most important currency manipulator over the past two decades, was responsible for nearly two thirds (61.3 percent) of the U.S. trade deficit in manufactured goods in 2015. The trade deficit with China increased in July. China has also distorted trade by generating massive amounts of excess production capacity in a wide range of industries, including steel, aluminium, glass, paper and renewable energy products. China’s capacity growth has been fueled by illegal subsidies and other unfair trade practices. A new report from Duke University explores the impacts of overcapacity in China’s steel industry.

Figure A

U.S. Broad Dollar Index, January 2007 – August 2016

Date Nominal Broad Dollar Index
Jan-2007 107.6971
Feb-2007 107.3298
Mar-2007 106.7851
Apr-2007 105.4372
May-2007 104.5442
Jun-2007 104.283
Jul-2007 102.9463
Aug-2007 103.523
Sep-2007 102.0819
Oct-2007 100.0667
Nov-2007 98.653
Dec-2007 99.4776
Jan-2008 98.6456
Feb-2008 97.828
Mar-2008 95.9081
Apr-2008 95.5365
May-2008 95.898
Jun-2008 96.075
Jul-2008 95.37
Aug-2008 97.8858
Sep-2008 100.3046
Oct-2008 106.9588
Nov-2008 109.6413
Dec-2008 108.4924
Jan-2009 109.1686
Feb-2009 111.8563
Mar-2009 112.342
Apr-2009 109.5536
May-2009 106.4023
Jun-2009 105.0395
Jul-2009 104.6451
Aug-2009 103.3931
Sep-2009 102.6134
Oct-2009 101.149
Nov-2009 100.6685
Dec-2009 101.1181
Jan-2010 101.3997
Feb-2010 102.9111
Mar-2010 102.0231
Apr-2010 101.5118
May-2010 104.3117
Jun-2010 104.8769
Jul-2010 103.2516
Aug-2010 102.4484
Sep-2010 101.4488
Oct-2010 98.8213
Nov-2010 99.1006
Dec-2010 99.7504
Jan-2011 98.5989
Feb-2011 97.8532
Mar-2011 96.9218
Apr-2011 95.3202
May-2011 95.2789
Jun-2011 95.2537
Jul-2011 94.5951
Aug-2011 95.138
Sep-2011 97.9794
Oct-2011 98.8877
Nov-2011 99.5205
Dec-2011 100.4525
Jan-2012 99.8207
Feb-2012 98.0948
Mar-2012 98.6947
Apr-2012 99.0143
May-2012 100.7322
Jun-2012 102.1692
Jul-2012 101.6766
Aug-2012 100.797
Sep-2012 99.2313
Oct-2012 98.9535
Nov-2012 99.583
Dec-2012 99.0173
Jan-2013 98.9353
Feb-2013 99.7569
Mar-2013 100.6193
Apr-2013 100.2646
May-2013 100.6962
Jun-2013 101.5256
Jul-2013 102.0797
Aug-2013 101.9734
Sep-2013 101.7617
Oct-2013 100.7445
Nov-2013 101.6386
Dec-2013 101.8164
Jan-2014 102.7873
Feb-2014 103.0426
Mar-2014 102.9621
Apr-2014 102.5691
May-2014 102.2406
Jun-2014 102.388
Jul-2014 102.1436
Aug-2014 103.0564
Sep-2014 104.6024
Oct-2014 105.9493
Nov-2014 107.7489
Dec-2014 110.3957
Jan-2015 112.7741
Feb-2015 114.2463
Mar-2015 116.2852
Apr-2015 115.0775
May-2015 114.1961
Jun-2015 115.1323
Jul-2015 117.1636
Aug-2015 119.4261
Sep-2015 120.3613
Oct-2015 119.2826
Nov-2015 121.084
Dec-2015 122.3758
Jan-2016 125.1504
Feb-2016 124.0358
Mar-2016 121.4929
Apr-2016 119.5276
May-2016 120.7668
Jun-2016 121.1508
Jul-2016 121.933
Aug-2016 120.8155
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As the United States prepares for the G20 summit meeting in Hangzhou, China, it is imperative that leaders prepare to confront China about its unfair trade and the massive amount of excess capacity, which is distorting global trade not just in these industries, but in sectors that use these primary commodities to produce a wide range of downstream products such as electrical appliances, machine tools, autos, and auto parts. The United States also must come to terms with its sustained failure to address the currency manipulation, and more recently developed problems of currency misalignment, which I will address in a subsequent post.