On March 23, the Economic Policy Institute (EPI) issued a study entitled “Unfair China Trade Costs Local Jobs.” As in the past, EPI has employed a flawed approach that equates exports with job gains and imports with job losses.

In short, the world isn’t that simple. Reflecting a zero-sum game mentality, EPI’s study assumes a widget imported from China is one less widget made by a U.S. producer. In this view, China’s sale is America’s loss.

This is clearly nonsense. Even setting aside EPI’s odd scenario of a world economy consisting of just two countries, economists agree that only about one-third to one-half of the value of U.S. imports from China is generated there. Much of the value of goods imported from China comes from the United States and other countries.

For example, a top-line Apple iPod assembled in China shows up in the U.S. trade accounts as an import worth hundreds of dollars. However, innovators in the United States realize 86% of the value from each unit sold, according to widely cited study. China may be carrying out the final assembly in this example, but the benefit to the United States is substantial.

EPI’s double-counting and misdirection run deep. Weren’t all these lost jobs already attributed to other causes (such as NAFTA) in earlier EPI studies? Wouldn’t it be fair to include 2009 data, instead of ending in 2008? In that case, the peculiar EPI model may have yielded a disappointing result because the 2009 trade deficit was considerably lower.

In fact, a quick glance at the historical record shows that EPI is on thin ice equating trade deficits with job loss:

• Between 1993 and 2007, the U.S. economy generated a net increase of 26 million new jobs in one of the greatest job creation booms in American history. During the same period, the trade deficit swelled from 1% of GDP to 6% of GDP.
• Since 2007, the trade deficit as a percentage of GDP has fallen by half, to 3% of GDP today. Simultaneously, the U.S. economy shed 8 million jobs.

Did the growth in the trade deficit create 26 million jobs? No. Nor did the more recent collapse of the trade deficit cause the loss of 8 million jobs. However, this record illustrates how EPI’s approach of ascribing job loss directly to the trade deficit is a fallacy.

EPI is correct that U.S. manufacturing employment hit a peak and then begin a steady decline. The problem is that the peak was in 1979, long before trade with China reached a significant level.

In fact, U.S. industrial production (most of which is manufacturing) rose 57% between 1993 and 2007, according to the Federal Reserve. Not only did U.S.-China trade explode in this period, but a productivity revolution was unleashed across the manufacturing sector. Technological change, automation, and widespread use of information technologies have allowed firms to boost output even as some have cut payrolls.

Since those years of growth, the Great Recession has dealt a hammer blow to the U.S. manufacturing sector. The financial crisis and the collapse in demand have led to millions of lost jobs.

But trade is not the culprit. Less than 3% of layoffs of 50 or more people between 1996 and 2004 were attributable to import competition or overseas relocation, according to survey data from the U.S. Bureau of Labor Statistics.

The U.S.-China trade relationship is entering troubled waters, and the U.S. business community has been forthright in highlighting significant concerns about China’s industrial policies and trade and investment practices that are discriminatory and aim to compel transfer of American’s innovative capacity to China.

The Obama Administration is working to address these challenges but needs to advance a comprehensive strategy that moves China away from state-led development and industrial policies toward a market-reliant model of economic growth.

In the meantime, EPI’s flawed analysis will lead only to flawed solutions.