The United States lost 3.5 million manufacturing jobs from the end of the 2000 to the end of 2007 and China was almost entirely to blame, a new research paper says.

The conclusion is probably not a big surprise, particularly to workers who saw their jobs shipped overseas, but the study offers an interesting twist. Authors Justin Pierce of the Federal Reserve and Peter Schott of Yale School of Management say Washington triggered the jobs exodus by reducing “policy uncertainty.
 
Policy uncertainty is usually a bad thing – witness recent battles in Washington over the debt ceiling and “fiscal cliff.” Economists and business executives say these fights make it harder to plan and invest and consumer confidence tends to suffer.

Yet in the case of China, policy uncertainty protected U.S. manufacturing jobs. The threat that Washington might slap stiff tariffs on goods made in China at any time keep more U.S. manufacturing at home, the authors argue.

The constant threat of tariffs – basically a tax on imported goods – largely ended in 2000. The Clinton White House and Republican-led Congress agreed to grant China the permanent right to be treated like other U.S. trading partners such as Europe or Japan. While tariffs can still be applied, the process is more complicated and takes longer to deploy, sometimes involving U.S. or international court hearings.

The new level of policy certainty, Pierce and Schott argue, spurred more U.S. manufacturers to shift plants and jobs to China to take advantage of lower labor costs. They no longer had to worry about sudden increases in tariffs when exporting their goods back to America.

The loss of U.S. manufacturing jobs accelerated sharply after China’s trading status was upgraded. Manufacturing employment fell to 13.7 million in 2007 from 17.2 million in 2000, according to the U.S. Labor Department.

Before 2000, the number of U.S. manufacturing jobs had barely changed in 20 years.

The erosion in manufacturing is also a big reason why the U.S. economy failed to add many jobs in the first two years after the 2001 recession. The economy only started to add jobs at a faster clip in 2004 and 2005 as growth in other sectors offset the loss of manufacturing employment.

Pierce and Schott contend the U.S. manufacturing sector may have increased employment from 2000 to 2007 if not for the change in China’s trading status. “(A)bsent the shift in U.S. policy, U.S. manufacturing employment would have risen nearly 10% between 2001 and 2007, versus an actual decline of more than 15%,” they wrote.

If the study is accurate, does that mean the U.S. made a mistake by normalizing trade relations with China? Certainly that’s a plausible argument in the short run.

Yet the U.S. has also benefited. American companies have become more productive and Americans are able to buy a wide range of consumer goods at lower prices. Other segments of the economy, such as agriculture and entertainment, have also been able to tap the large Chinese market to sell American-made goods and services.

What’s more, U.S. manufacturers may still have shipped jobs overseas to other low-cost countries that already enjoyed normal trading ties.

It’s also possible the damage caused by normalized trade relations with China has largely run its course. The U.S shed more manufacturing jobs during the steep 2007-2009 recession and total employment fell to as low as 11.5 million, but it crept back up to 12 million at the end of 2012.

There’s even the chance the U.S. will experience a mini-rebound in manufacturing because of falling energy costs – mainly natural gas – and rising wages in China. Those trends have made the U.S. a more competitive market for manufacturers to locate compared to a decade ago.