EPI’s Trade Studies: Here We Go Again

Sep 22, 2011

The Economic Policy Institute (EPI) has issued the latest version of their study entitled “Growing U.S. trade deficit with China cost 2.8 million jobs between 2001 and 2010.” 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. Not only are there more than two countries in the world, but economists agree that only a fraction 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.

As a fascinating recent article entitled “The U.S. Content of ‘Made in China’” in the Economic Letter of the Federal Reserve Bank of San Francisco points out, imports of Chinese goods account for less of U.S. consumption than you might think:

Goods and services from China accounted for only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carrying the “Made in China” label… on average, of every dollar spent on an item labeled “Made in China,” 55 cents go for services produced in the United States.

This analysis, prepared by researchers with the Economic Research Department of the Federal Reserve Bank of San Francisco, sounds familiar. We’ve heard before the example of how a top-line Apple iPod assembled in China shows up in the U.S. trade accounts as an import worth hundreds of dollars.

In the iPod example, 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.

Further, 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.
  • Between 2007 and 2010, the trade deficit as a percentage of GDP fell by half, to 3% of GDP. Simultaneously, the U.S. economy shed 7 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 7 million jobs.

Rather, these facts show that strong economic growth drives both job creation and a widening trade deficit. In any event, these simple facts illustrate 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. manufacturing output rose 81% in the 1988-2008 period. 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.

U.S. officials and the business community are working to address these challenges, but we need 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.

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