EPI Gets Trade and Jobs Story Wrong Again

According to a report released today by the Economic Policy Institute, trade with China has caused a loss of 2.3 million American jobs since the Asian giant joined the World Trade Organization in 2001. The study will get a lot of coverage, but its numbers and methodology are shockingly flawed.

This is a well-traveled road for EPI and the report’s main author Robert Scott. Scott has authored other reports that have come to the same conclusion about NAFTA and earlier periods of trade with China. The methodology virtually guarantees a finding of job losses: It assumes that imports displace a certain number of workers while exports create new jobs, and since we run trade deficits with China and Mexico—surprise!—trade with those countries leads to net job losses.

I’ve dissected the flaws of EPI’s approach elsewhere, but to just summarize what everyone should keep in mind when you read about the EPI report:

EPI exaggerates the number of American companies and workers who compete directly against Chinese imports. Many of our main imports from China—shoes, clothing, toys, and consumer electronics—were being imported from other countries before China’s emergence as a major supplier. In fact, as imports from China have risen since 2001 as a share of total imports, imports from other Asian countries have been in relative decline. So imports from China do not typically displace U.S. production but instead displace imports from other countries. In fact, in the past year, the U.S. unemployment rate has been heading up as our overall trade deficit has been heading down.

EPI ignores the creation of jobs elsewhere in the economy that are made possible by trade and globalization. Exports aren’t the only channel through which trade and globalization creates jobs. Foreign capital flowing into the United States—the flip side of the trade deficit—creates jobs through direct investment in U.S. companies and indirectly by lowering interest rates, which stimulates more domestic investment.

Even when trade does displace workers, in a flexible and growing economy, new jobs will be created elsewhere. As I reported in my October 2007 study “Trading Up,” job losses in manufacturing during the past decade have been more than offset by net job gains in better-paying services sectors.

Since China joined the WTO in 2001, U.S. exports to China have shot up by 22 percent per year, the U.S. economy has added a net 6 million new jobs, real compensation per hour earned by U.S. workers—that is, wages plus benefits adjusted for inflation—is up 9 percent, and manufacturing output is up 10 percent. Last year, America’s supposedly beleaguered manufacturers earned collective profits of $305 billion, more than five times what they earned the year China joined the WTO.

As we struggle through a domestic slowdown and rising prices for consumers, we could use more trade with China, not less.