Tag: trade deficits

More Trade, More Jobs

Our friends at the Economic Policy Institute are at it again, issuing another study this week that shows some particular trade agreement has cost X thousands of jobs over a certain number of years.

The latest target of EPI’s flawed model is the North American Free Trade Agreement. Enacted in 1994, NAFTA has created a free trade zone comprising the United States, Canada, and Mexico. According to the EPI report,

U.S. trade deficits with Mexico as of 2010 displaced production that could have supported 682,900 U.S. jobs; given the pre-NAFTA trade surplus, all of those jobs have been lost or displaced since NAFTA. This estimate of 682,900 net jobs displaced takes into account the additional jobs created by exports to Mexico.

The report’s author, Robert Scott, claims it foreshadows job losses if Congress passes pending trade agreements with South Korea, Colombia, and Panama.

The EPI model has little relevance to the real American job market. As I’ve pointed out before (here and here), its model is based on an overly narrow view of trade’s impact on the job market. Yes, some people do lose their jobs because of import competition, no news there, but trade also creates jobs through increased exports. And even if we run a trade deficit with a country such as China or Mexico, jobs are also being created by the net inflow of foreign capital, which spurs domestic job creation through lower interest rates and direct investment. The money we save from lower-priced imports also liberates consumer dollars to fuel growth elsewhere in our economy, and cuts costs for import-consuming businesses, boosting their sales and employment.

Next, consider the EPI numbers on their face. Those alleged 682,900 net jobs lost came over a 16-year period. That’s a bit more than 40,000 jobs lost per year. That is a drop in the bucket in a dynamic economy like ours that creates and eliminates about 15 million jobs each year. Even when unemployment is low, 300,000 or more Americans file for unemployment insurance in a typical week. So even if true, the EPI job loss numbers amount to less than one day’s worth of job displacement for the whole year.

When we look at the actual job market performance since NAFTA was enacted, the irrelevance of the EPI model becomes plain. In the first five years after NAFTA’s passage, 1994-98, when we could have expected it to have the most impact, the U.S. economy ADDED a net 15 million new jobs, including 700,000 manufacturing jobs. In the 16 years since its passage, despite two recessions, our economy still employs 20 million more workers than it did the year before NAFTA passed. (Check out the employment tables in the latest Economic Report of the President.)

In my own April 2011 study of trade and the economy, “The Trade-Balance Creed,” I found that civilian employment in the past 30 years has actually grown quite a bit faster during periods of rising trade deficits compared to periods of declining deficits, just the opposite of what EPI’s distorted model would predict.

Time for a Reality Check on the Trade Deficit

The U.S. trade deficit rose in January, according to this morning’s monthly trade report from the U.S. Commerce Department, and on cue the news is being greeted as a bad omen for the U.S. economy.

Reflecting the conventional wisdom, this morning’s Associated Press story states as a matter of fact, with no attribution:

A widening trade deficit hurts the U.S. economy. When imports outpace exports, more jobs go to foreign workers than to U.S. workers.

Oh really? As I’ve documented elsewhere, the U.S. economy actually grows faster during periods when the trade deficit is widening compared to when it is shrinking. That’s because an expanding economy increases demand for imports as well as domestically made goods. Stronger growth also attracts more foreign investment, which is the flip side of the trade deficit.

The same story is true for jobs. In Chapter 5 of my 2009 Cato book, Mad about Trade, I show how the unemployment rate invariably rises during periods when the trade deficit is “improving,” and declines during periods when the deficit is “worsening.” (Check out Table 2.2 on p. 81, courtesy of Google Books.)

Just think back to the 1990s. From 1992 to 2000, the trade deficit widened from 0.5 percent of GDP to 3.9 percent. During that same period, the unemployment rate fell from 7.3 percent to 3.9 percent and the economy added more than 18 million jobs.

More recently, the trade deficit narrowed sharply between 2007 and 2009 as a share of GDP, while the economy lost more than 8 million jobs and unemployment soared.

The conventional wisdom on trade deficits and the economy is due for a reality check. If politicians believe that “a widening trade deficit hurts the economy,” contrary to all the evidence, they will be more tempted to reach for the snake oil of protectionism.

Media Feeds America’s Skepticism about Trade

As usual, Dan Griswold does an excellent job today correcting fallacies about trade and the trade deficit that continue to be perpetuated in the mainstream media (particularly at the Washington Post).  

I just want to add my two cents without belaboring any of Dan’s succinctly-made points.  (Besides, I’ve harped on and on and on and on and on about the problem of trade reporting this year.) It’s a shame that so much time and energy has to be diverted to cleaning up messes left by reporters and editors, who should know better by now.

The bottom line is that neither imports nor trade deficits cause U.S. job loss or slower economic growth.  If anything, the charts below (all compiled from BEA and BLS data) support the conclusion that imports and the trade deficit rise when the economy is growing and creating jobs, and they both fall when the economy is contracting and shedding jobs. 

Prominent Economists Debate Trade Deficits

Following Dan’s and David’s recent posts on the trade deficit and its (ir)relevance, allow me to draw readers’ attention to the Economist’s “By Invitation” blog, where invited prominent economists debate topical economic issues.

One of their current questions is: Should governments take any steps to boost exports? That’s an important topic, and an especially timely one given the Obama administration’s ‘National Export Initiative,’ a five-year plan to double U.S. exports. All of us here at Cato’s trade center have previously expressed skepticism about the feasiblity and/or wisdom of that plan, and Dan Ikenson blogged earlier today about the administration’s apparent incoherence in pursuit of that goal

The Economist’s debate talks about industrial policy and export promotion in the abstract, rather than the NEI per se, but I recommend checking it out. Scott Sumner and Laurence Kotlikoff make especially good sense.

More Nonsense about the Trade Deficit

It has become conventional wisdom that a rising trade deficit is bad news for the economy. This week’s announcement of an expanding deficit in June prompted such headlines today as this one in the news pages of the Wall Street Journal: “Wider Trade Gap Signals Weak Growth.” As my colleague David Boaz blogged earlier today, the trade deficit is even blamed for daily swings in the stock market.

I’ve been studying and writing about the trade deficit for years, and devoted a whole chapter of my 2009 Cato book Mad about Trade to the subject, and I keep coming back to a basic question: If the trade deficit signals weak growth, why does the U.S. economy seem to perform so much better during periods when the trade deficit is growing, and so much worse when the trade deficit is shrinking?

Think back to the 1990s, the “goldilocks economy” when growth was strong, jobs plentiful, and inflation low. That was also a time of rising trade deficits. In fact, the trade gap grew for eight years in a row, rising from $77 billion in 1991 to $455 billion in 2000. In that same period, the unemployment rate dropped from 7.3 to 3.9 percent.

Again, in the middle of the George W. Bush presidency, the trade gap grew for five straight years, during a period when the economy expanded and the unemployment rate fell from 5.7 to 4.4 percent.

In contrast, the trade deficit invariably shrinks during periods of recession. The trade deficit fell by more than half from 2007 to 2009 as domestic demand and imports plunged and unemployment soared. Sagging domestic demand means fewer imports.

Of course, I’m not arguing that a bigger trade deficit stimulates the economy. I am arguing, contrary to the conventional wisdom reflected in this morning’s headlines, that an expanding trade deficit does not appear to be a drag on growth. In fact, the plain evidence is that an expanding trade deficit is more often than not a signal of stronger growth.

Trade Gap Plunges in 2009, but Where Are the Jobs?

Lost in the buzz last week over health care was the news that the broadest measure of the U.S. trade deficit fell sharply in 2009 from the year before. According to the Bureau of Economic Analysis, the U.S. current account deficit plunged from $706 billion in 2008 to $420 billion last year – the smallest deficit since 2001.

I’ve been waiting for a few days now for the usual trade deficit hawks to hail this development as great news for millions of Americans looking for work.

In years when the trade deficit was rising, it was common practice for the labor-union-friendly Economic Policy Institute to publish detailed studies showing that larger trade deficits caused the U.S. economy to lose hundreds of thousands of jobs each year. For example, according to an October 2008 EPI paper, rising non-petroleum trade deficits from 2000 to 2006 caused a lost of 484,400 jobs per year, while the shrinking deficit in 2007 lead to the creation of 272,500 jobs.

By the EPI’s own internal logic, the past two years should have been a boom time for job creation. Between 2007 and 2009, the non-petroleum trade deficit dropped by $174 billion as the sagging domestic economy cut demand for impost. If that was good news for jobs, somebody forgot to tell the U.S. labor market. Since the end of 2007, the U.S. economy has shed a net 8 million jobs.

Oops, maybe it’s time for EPI to rework its model.