The Economic Policy Institute recently predicted huge job losses in the U.S. economy if Congress approves permanent normal trade relations (PNTR) with China. With incredible specificity, EPI claims in a recent paper that approval of the trade deal "will eliminate at least 872,091 jobs between 1999 and 2010." The paper even assigns specific job losses to individual states, ranging from 84,294 lost in California to 544 lost in Alaska.
These alarmist predictions about job losses caused by expanding trade are based on flawed economic reasoning and invariably conflict with empirical evidence. The EPI study is no exception. First, EPI assumes every import from China displaces domestic production, eliminating jobs in the economy.
In reality, much of what we import from China, such as toys, shoes, and clothing, substitutes for imports from other low-wage producers. Another sizeable portion of our imports consists of intermediate inputs, which are then assembled into U.S.-made products by American manufacturers. That helps to explain why there is no correlation between rising manufacturing imports and falling manufacturing output. In fact, imports and output tend to rise together because both are associated with overall economic growth (Hufbauer and Rosen). From 1992 through 1999, while the value of manufactured goods imported to the United States more than doubled, manufacturing output rose by a robust 42 percent (Griswold, 1999).
Second, EPI assumes that passage of PNTR will entice U.S. companies to relocate en masse to China—that "giant sucking sound" again, this time over the Pacific. But if U.S. companies gain greater access to the Chinese market through PNTR, they will be better able to export to China from U.S. plants rather than be forced to build plants in China to gain access. EPI points to Mexico as an example of such capital flight, but in the five years after passage of the North American Free Trade Agreement, U.S. direct investments in Mexican manufacturing averaged less than $2 billion a year—about 1 percent of annual investment in domestic manufacturing. Direct manufacturing investment in China during that same period averaged less than $1 billion a year (Griswold, 2000).
Third, predictions of job losses from trade expansion contradict the most obvious facts of recent U.S. economic performance. In the last five years, as America’s bilateral trade deficit with China has more than doubled, the U.S. unemployment rate has fallen to a 30-year low, real wages and compensation are rising strongly for all income groups, and manufacturing output continues to surge.
Passage of PNTR with China will create not more or fewer jobs in the U.S. economy but better jobs. The opening of China’s market to competition from U.S. firms will allow Americans to produce more of what we are best at producing: telecommunications and computer equipment, electrical machinery, software, movies, financial services, soybeans, and wheat (Groombridge).
Passage of PNTR will raise incomes and create new opportunities for workers in both China and America. If Congress follows EPI’s analysis and PNTR for China fails, the result will be a less desirable mix of jobs. There will be fewer Americans writing software and designing computer chips and more of us making shoes.