Commentary

Trade Deficits Don’t Mean Lost Jobs

By Daniel Griswold
This article appeared on freetrade.org on July 1, 1998.

The ongoing globalization of economic life leaves many Americans nervous and suspicious. Pat Buchanan has played to this anxiety with his book, The Great Betrayal, a root-and-branch rejection of free trade in favor of a “new nationalism.”

In this series, Cato Center for Trade Policy Studies scholars take issue with much of what Buchanan writes, and offer an alternative perspective to Buchanan’s protectionist analysis.

Buchanan on the trade deficit and jobs: “In 1996 the U.S. merchandise trade deficit hit an astounding $191 billion. Never before had an advanced industrial nation recorded such a deficit. If, as Presidents Bush and Clinton have contended, $1 billion in exports equals twenty thousand jobs, America loses between 3.5 million and 4 million manufacturing jobs annually.”1

A study by the Institute for Policy Studies in January 1998 predicts that the larger trade deficit caused by the East Asian financial meltdown will cost the U.S. economy more than 1 million jobs. Columnist Patrick Buchanan, when running unsuccessfully for the Republican presidential nomination in 1996, offered his own, back-of-the-envelope estimate of jobs lost because of the trade gap: “Our merchandise trade deficit was $175 billion (in 1995). For every $1 billion, you get 20,000 jobs. That’s 3.5 million American workers who would have had good manufacturing jobs if we simply had a trade balance.”2 Both estimates are based on a fundamental misunderstanding of the relationship between trade and aggregate employment in the United States.

The total number of jobs in the United States is largely determined by fundamental macroeconomic factors such as labor-supply growth and monetary policy. Trade with other nations does not reduce the number of jobs, but it does quicken the pace at which production shifts from one sector to another. Trade, like new technology, lowers demand for some jobs while raising demand for others. Trade allows the United States to produce more Boeing jetliners, pharmaceuticals, software, and financial services for export, but trade also means we produce fewer shoes, T-shirts, Happy Meal toys, and computer memory chips. Meanwhile, total output and total employment keep growing.

In reality, larger trade deficits correlate positively with falling unemployment. The nearby figure illustrates how closely the unemployment rate corresponds with changes in the U.S. trade deficit. When the trade deficit expands, as it did in the 1980s, unemployment falls. When the deficit shrinks, as it did during the 1990-91 recession, the unemployment rate rises. As the trade deficit has expanded in the 1990s, the unemployment rate has fallen steadily. The unemployment rate fell in all but 2 of the most recent 14 years in which the trade deficit grew larger than it had been the previous year (1976-78, 1982-87, 1992-94, 1996-97).3 As an expanding economy creates jobs, it also creates demand for imports and for capital from abroad.

Figure
The Trade Balance and Unemployment
image

There is no reason to believe that eliminating the trade deficit would create any gain in manufacturing jobs, never mind 3.5 million. With the U.S. economy already operating at a low level of unemployment, it is not clear where 3.5 million new manufacturing workers would come from. And a protective tariff to close the trade deficit would only succeed in reducing exports as well as imports, thus eliminating manufacturing jobs in the export sector. If Buchanan’s calculations had any meaning, we should expect to see a fall in manufacturing employment during periods of rising trade deficits. Recent economic trends tell a different story. Since 1993 the U.S. merchandise trade deficit has grown from $132 billion to $198 billion.4 In that same period the number of Americans employed in manufacturing has grown from 18,075,000 to 18,678,000 — an increase of more than 600,000.5

If anything, rising trade deficits signal more jobs, not fewer.

For more on the trade deficit, see “America’s Maligned and Misunderstood Trade Deficit” by Daniel Griswold.


Notes:

1. The Great Betrayal: How American Sovereignty and Social Justice Are Being Sacrificed to the Gods of the Global Economy, by Patrick J. Buchanan, New York: Little, Brown, Page 107.

2. Quoted in Wayne Leighton, “Playing with the Numbers: Why Protectionists Are Wrong about Trade,” Issue Analysis, Citizens for a Sound Economy Foundation, Washington, September 18, 1997, p. 1. Buchanan made his remark on CNN on March 3, 1996.

3. See Council of Economic Advisers, Economic Report of the President 1998, Table B-103, for the annual trade deficit figures and Table B-42 for the annual unemployment rates.

4. Ibid., Table 103. The 1998 merchandise trade figure was released February 19, 1998, by the Bureau of Economic Analysis, http://www.census.gov/indicator/.

5. Council of Economic Advisers, Economic Report of the President 1998, Table B-46, p. 334.

For a general overview of The Great Betrayal, see Brink Lindsey’s review, which appeared in the July 1998 issue of Reason magazine.

More in-depth analysis of The Great Betrayal:

Daniel Griswold is director of the Center for Trade Policy Studies at the Cato Institute and author of the new book, Mad About Trade: Why Main Street America Should Embrace Globalization (Washington: Cato Institute, 2009).