America Mostly Lost Factory Share Because Shoppers Favored Services Over Goods
America did import more finished goods, but it brought home parts production to offset the loss.
Noahpinion · Roundup #84: Bears on bikesThe reason America makes less of its economy in factories is mostly not that China took the work. It is that Americans now spend a smaller share of their money on factory made things, and a larger share on services like health care, dining out, and travel.
That is the result of a breakdown by Richard Baldwin, an economist who divided the numbers for rich countries into three parts: how much buying shifted toward services, how much completed products shifted from domestic factories to imports, and how much parts and materials shifted from domestic suppliers to imports.
For the United States since 1995, the first part explains almost all of the decline. America did import more finished goods, from cars to clothes. But in dollar terms, that loss was almost canceled out because America actually brought home more production of intermediate goods, the parts, components, and materials that go into finished products.
Other rich countries look very different, even though their factories shrank too. In Germany and Japan, shoppers devoted a bigger share to factory made products, yet those countries gave up a large share of the market for parts and materials. In France, Canada, and Britain, all three factors contributed to the decline.
In other words, the familiar story that the United States outsourced everything fits other countries better than it fits America. The main reason America makes relatively less stuff is that, at least in relative terms, it wants more services and experiences than stuff.
Questions people ask
What is the difference between final goods and intermediate goods?
Intermediate goods are the parts, components, steel, chemicals, and other inputs that factories use to make finished products. A car assembled in Ohio with an imported engine involves trade in both finished and intermediate goods.
Does this mean trade with China did not hurt American factory workers?
No. Imports of finished goods did cut some U.S. factory work. Baldwin's breakdown covers only the change since 1995 in manufacturing's share of output in dollar terms, and finds the import loss was nearly offset by more domestic production of parts, leaving the shift in spending toward services as the much larger force.
Why do richer countries spend a smaller share on manufactured goods?
It is a common pattern as countries get richer. Once households own cars, appliances, and clothes, extra income tends to go toward health care, education, restaurants, and travel. Because services grow faster, manufacturing shrinks as a share of spending even if people still buy plenty of goods.