Costly
Trade With China
Millions of
U.S. jobs displaced with net job loss in
every state
by
Robert E. Scott
See media kit
Contrary to the predictions
of its supporters, China's entry into the
World Trade Organization (WTO) has failed to
reduce its trade surplus with the United
States or increase overall U.S. employment.
The rise in the U.S. trade deficit with
China between 1997 and 2006 has displaced
production that could have supported
2,166,000 U.S. jobs. Most of these jobs (1.8
million) have been lost since China entered
the WTO in 2001. Between 1997 and 2001,
growing trade deficits displaced an average
of 101,000 jobs per year, or slightly more
than the total employment in Manchester, New
Hampshire. Since China entered the WTO in
2001, job losses increased to an average of
441,000 per year—more than the total
employment in greater Dayton, Ohio. Between
2001 and 2006, jobs were displaced in every
state and the District of Columbia. Nearly
three-quarters of the jobs displaced were in
manufacturing industries. Simply put, the
promised benefits of trade liberalization
with China have been unfulfilled.
As a matter of policy, China
tightly pegs its currency's value to that of
the dollar at a rate that encourages a large
bilateral surplus with the United States.
Maintaining this peg required the purchase
of about $200 billion in U.S. Treasury Bills
and other securities in 2006 alone.1
This intervention makes the yuan
artificially cheap and provides an effective
subsidy on Chinese exports; best estimates
are that the rate of this effective subsidy
is roughly 40%. China also engages in
extensive suppression of labor rights; it
has been estimated that wages in China would
be 47% to 85% higher in the absence of labor
repression. China has also been accused of
massive direct subsidization of export
production. Finally, it maintains strict,
non-tariff barriers to imports. As a result,
China's exports to the United States of $288
billion in 2006 were
six times greater than U.S. exports
to China, which were only $52 billion (Table
1). China's trade surplus was
responsible for 42.6% of the United States'
total, non-oil trade deficit. This is by far
the United States' most imbalanced trading
relationship. Unless and until China
revalues (raises) the yuan and eliminates
these other trade distortions, the U.S.
trade deficit and job losses will continue
to grow rapidly in the future.
Major findings of this
study:
- The 1.8 million jobs
opportunities lost nationwide since
2001 are distributed among all 50
states and the District of Columbia,
with the biggest losers, in numeric
terms: California (-269,300), Texas
(-136,900), New York (-105,900),
Illinois (-79,900), Pennsylvania
(-78,200), North Carolina (-77,200),
Florida (-71,900), Ohio (-66,100),
Georgia (-60,400), and Massachusetts
(-59,300) (Table
2A).
- The 10 hardest-hit states, as a
share of total state employment,
are: New Hampshire (-13,000, -2.1%),
North Carolina (-77,200, -2.0%),
California (-269,300, -1.8%),
Massachusetts (-59,300, -1.8%),
Rhode Island (-8,400, -1.8%), South
Carolina (-29,200, -1.6%), Vermont
(-4,900, -1.6%), Oregon (-25,700,
-1.6%), Indiana (-45,200, -1.5%),
and Georgia (-60,400, -1.5%) (Table
2B).
China's entry into the WTO
was supposed to bring it into compliance
with an enforceable, rules-based regime,
which would require that it open its markets
to imports from the United States and other
nations. The United States also negotiated a
series of special safeguard measures
designed to limit the disruptive effects of
surging Chinese imports on domestic
producers. However, the core of the
agreement failed to include any protections
to maintain or improve labor or
environmental standards. As a result,
China's entry into the WTO has further
tilted the international economic playing
field against domestic workers and firms,
and in favor of multinational companies (MNCs)
from the United States and other countries,
and state- and privately-owned exporters in
China. This has increased the global "race
to the bottom" in wages and environmental
quality and caused the closing of thousands
of U.S. factories, decimating employment in
a wide range of communities, states, and
entire regions of the United States.
False
promises
Proponents of China's entry into the WTO
frequently claimed that it would create jobs
in the United States, increase U.S. exports,
and improve the trade deficit with China.
President Clinton claimed that the agreement
allowing China into the WTO, which was
negotiated during his administration,
"creates a win-win result for both
countries" (Clinton 2000, 9). He argued that
exports to China "now support hundreds of
thousands of American jobs" and that "these
figures can grow substantially with the new
access to the Chinese market the WTO
agreement creates" (Clinton 2000, 10).
Others in the White House, such as Kenneth
Liberthal, the special advisor to the
president and senior director for Asia
affairs at the National Security Council,
echoed Clinton's assessment:
Let's be clear as to why a trade
deficit might decrease in the short
term. China exports far more to the
U.S. than it imports [from] the U.S….It
will not grow as much as it would
have grown without this agreement
and over time clearly it will shrink
with this agreement.2
Promises about jobs and exports
misrepresented the real effects of trade on
the U.S. economy: trade both creates and
destroys jobs. Increases in U.S. exports
tend to create jobs in the United States,
but increases in imports tend to destroy
jobs as imports displace goods that
otherwise would have been made in the United
States by domestic workers.
The impact of changes in
trade on employment is estimated here by
calculating the labor content of changes in
the trade balance—the difference between
exports and imports. Each $1 billion in
computer exports to China from the United
States supports American jobs. However, each
$1 billion in computer imports
from China
displaces those American workers, who would
have been employed making them in the United
States. On balance, the net employment
effect of trade flows depends on the growth
in the trade deficit;
not just exports. Another critically
important promise made by the promoters of
liberalized U.S.-China trade was that the
United States would benefit because of
increased exports to a large and growing
consumer market in China. This market, in
turn, was to be based on an expansion of the
middle class that, it was claimed, would
grow rapidly due to the wealth created in
China by its entry into the WTO. However,
the increase in U.S. exports to China has
been overwhelmed by the growth of U.S.
imports, as shown below.
Growing trade deficits and job losses
The U.S. trade deficit with China has
increased from $50 billion in 1997 to $235
billion in 2006, an increase of $185
billion, as shown in Table 1. Between 1997
and 2001, prior to China's entry into the
WTO, the deficit increased $9 billion per
year on average. Between 2001 and 2006,
after China entered the WTO, the deficit
increased $38 billion per year on average.
While it is true that
exports support jobs in the United States,
it is equally true that imports displace
them. The net effect of trade flows on
employment must look at the
trade balance.
The employment impacts of growing trade
deficits are estimated in this paper using
an input-output model that estimates the
direct and indirect labor requirements of
producing output in a given domestic
industry. The model includes 200 U.S.
industries, 86 of which are in the
manufacturing sector (see this paper's
methodology appendix for further details).3
The model estimates the
labor that would be required to produce a
given volume of exports, and the labor that
is displaced when a given volume of imports
is substituted for domestic output.4
The job losses presented here represent an
estimate of what sectoral employment levels
would have been in the absence of growing
trade deficits.5
U.S. exports to China in
1997 supported 138,000 jobs, but U.S.
imports displaced production that would have
supported 736,000 jobs, as shown in the
bottom half of Table 1. Therefore, the $49
billion trade deficit in 1997 displaced
736,300 jobs in that year. Job displacement
rose to 1,000,000 jobs in 2001 and 2,763,000
in 2006. Prior to China's entry into the WTO,
an average of 101,000 jobs per year were
displaced by growing trade deficits between
1997 and 2001. After 2001, an average of
441,000 jobs per year were lost.
Growth in trade deficits
with China has reduced demand for goods
produced in every region of the United
States and has led to job displacement in
all 50 states and the District of Columbia,
as shown in Table 2A and
Figure A.6 More than
100,000 jobs were lost in California, Texas,
and New York each. Jobs displaced due to
growing deficits with China equaled or
exceeded 2.0% of total employment in states
such as North Carolina and New Hampshire, as
shown in Table 2B. An alphabetical list of
job losses by state is shown in
Table 2C.
Growing trade deficits with
China have clearly reduced domestic
employment in traded goods industries,
especially in the manufacturing sector,
which has been hard hit by plant closings
and job losses. Workers displaced by trade
from the manufacturing sector have been
shown to have particular difficulty in
securing comparable employment elsewhere in
the economy. More than one-third of workers
displaced from manufacturing drop out of the
labor force (Kletzer 2001, 101, Table D2).
Average wages of those who secured
re-employment fell 11% to 13%. Trade-related
job displacement pushes many workers out of
good jobs in manufacturing and other
trade-related industries, often into
lower-paying industries and frequently out
of the labor market.
Some economists have
quibbled with job-loss numbers extrapolated
from trade flows, based on the presumption
that aggregate
employment levels in the United States are
set by a broad range of macroeconomic
influences, not just by trade flows. There
is a grain of truth to this—the trade
balance is but one of many variables
affecting aggregate job creation in the
United States.
That said, the employment
impacts of trade identified in this paper
can be interpreted as the "all else equal"
effect of trade on domestic employment. The
Federal Reserve, for example, may decide to
cut interest rates to make up for job loss
stemming from deteriorating trade balances
(or any other economic influence), leaving
net employment unchanged. This, however,
does not change the fact that trade deficits
by themselves
are a net drain on employment.
Administration officials and
other economists have argued that the
capital inflow that is the mirror-image of
trade deficits supports jobs in the United
States by keeping interest rates lower than
they would be absent this inflow. During the
late 1990s, for example, these capital
inflows fought rising trade deficits to a
draw in terms of aggregate employment
effects, and, through much of the 2000s
recovery, interest-sensitive industries
(housing and construction, for example) have
surely expanded more than they would have
absent foreign capital inflows. While these
claims may be correct from a simple
accounting standpoint, they do not support
assertions that trade flows are a useless
indicator of job loss.
First, and most simply, it
is just not true that foreign capital
inflows always make up trade-induced
employment losses one-for-one. In the 2001
recession and the jobless recovery
following, growing trade deficits
accompanied aggregate job loss, even as
interest rates scraped historical bottoms.
Clearly, low interest rates do not always
translate into enough growth in investment
and consumption in interest-sensitive
sectors to always sterilize the impact of
growing trade deficits.
Second, the job-loss numbers
identified in this report are a good measure
of just how unbalanced the U.S. economy has
become due to rising trade deficits.
Tradable goods industries have hemorrhaged
jobs, while interest-sensitive, often
non-tradable, industries have seen rapid
growth. At that point in the future when
trade deficits begin to close (and this will
happen—it is only a question of when and
how), the U.S. economy will need to return
many of the jobs displaced by rising trade
deficits out of non-tradable and into
tradable industries. Moving millions of
workers back and forth between sectors is no
mean trick, and accomplishing it without a
recession in between will be hard; trying to
do it after another couple of years of
deficit growth—and an even more lopsided
U.S. economy—will be even harder.
In short, while aggregate
employment in the United States may well not
respond job-for-job with the numbers
reported in this paper on trade deficits
with China, these numbers provide insight
into how much harder other macroeconomic
influences have to work to eliminate the
employment drag from these deficits, and
they provide a good (and ominous) measure of
how lopsided employment growth in the U.S.
economy has become owing to the unbalanced
U.S.-China trade relationship.
Conclusion
The growing U.S. trade deficit with
China has displaced huge numbers of jobs in
the United States, and been a prime
contributor to the crisis in manufacturing
employment over the past six years. The
current U.S.-China trade relationship is bad
for both countries. The United States is
piling up foreign debt, losing export
capacity, and facing a more fragile
macroeconomic environment. Meanwhile, China
has become dependent on the U.S. consumer
market for employment generation, has
suppressed the purchasing power of its own
middle class with a weak currency, and, most
importantly, has held hundreds of billions
of hard-currency reserves in low-yielding,
risky assets, instead of investing them in
public goods that could benefit Chinese
households. Its repression of labor rights
has suppressed wages, thus subsidizing its
exports and making them artificially cheap.
This relationship needs a fundamental
change: addressing the exchange rate
policies and labor standards issues in the
Chinese economy are important first steps.
April
2007
The
author thanks Lauren Marra for her research
assistance
and Josh Bivens and Ross Eisenbrey for
comments.
This
research was made possible by generous
support
from the Alliance for American
Manufacturing.
Methodology
This analysis utilizes an
input-output model to estimate the
relationships between changes in trade flows
and production that could support domestic
employment. The analysis covers trends in
goods trade, which is dominated by
manufactures. Services trade is not
considered because of problems with the
data, and because many of the services
traded involve returns to capital and
intellectual property that have little or no
direct effect on employment. In addition,
goods trade dominates the nation's
international accounts.
This study uses the model
developed in Rothstein and Scott (1997a and
1997b). This approach solves four problems
that are prevalent in previous research on
the employment effects of trade. Some
studies look only at the effects of exports
and ignore imports. Some studies include
re-exports (transshipments)—goods produced
outside the United States and shipped
through this country to other nations—as
U.S. exports. The trade data used in many
studies is usually not adjusted for
inflation. Finally, a single employment
multiplier is often applied to all
industries, despite differences in labor
productivity and utilization.7
The model used here is based
on the Bureau of Labor Statistics'
employment requirements tables, which were
derived from the U.S. input-output tables
that are published by the Bureau of Economic
Analysis. These tables are adjusted to 2000
price and productivity levels (BLS 2007b),
in real, chain-weighted 2000 dollars. A base
year with 2000 employment requirements was
used to estimate the employment content of
trade in all years covered in this study.
This assumption was needed to control for
the effects of technology. This technique
isolates the effects of trade on employment
from pure technology effects. This model is
used to estimate the direct and indirect
effects of changes in goods trade flows in
each of 200 industries. This study updates
the 1987 input employment requirements table
used in earlier reports in this series
(Rothstein and Scott 1997a, 1997b).
This analysis requires
four-digit, trade data based on the North
American Industry Classification System (NAICS)
(U.S. International Trade Commission 2007),
deflated with industry-specific,
chain-weighted price indices (BLS 2007a),
which were updated using industry-specific
producer price indexes (BLS 2007b).8
Trade data were downloaded from the U.S.
International Trade Commission (2007) Web
site in NAICS format. The data for 2006 are
preliminary estimates; this report will be
updated and expanded when the final 2006
trade data are released in June 2007.
State-level employment effects are
calculated by allocating imports and exports
to the states on the basis of their share of
four-digit, industry-level employment for
2000 (U.S. Census Bureau 2001).
The trade data were
converted into chain-weighted 2000 dollars.
A domestic employment requirements table for
a particular base year was used to estimate
the employment effects of trade in each year
of the analysis, holding technology
constant. The domestic employment
requirement calculates the labor required to
produce all of a given product within the
United States. Thus, it reflects the
complete labor content of output, including
jobs indirectly supported in service
industries. The base year of 2000 was chosen
for this study because it was an approximate
mid-point in the data covered in this study.
CPS data on employment by
industry by was collected for each of the
detailed sectors in the model. These data
were used to calculate each state's share of
national employment.
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Globalization That
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Endnotes
1. These purchases financed
about one-quarter of the U.S. $857 billion
current account deficit in 2006 (the
broadest measure of all U.S. trade and
income flows). But for these purchases, the
reduced demand would have put significant
downward pressure on the U.S. dollar. A
substantial depreciation in the dollar would
begin to improve the U.S. trade deficit
within a few years.
2.
NewsHour with Jim Lehrer transcript.
1999. "Online NewsHour: Opening
Trade—November 15, 1999."
http://www.pbs.org/newshour/bb/asia/july-dec99/wto_11-15.html.
3. See Ratner (2006) for a
more complete, technical description of this
model.
4. For the purposes of this
report, it is necessary to distinguish
between exports produced domestically and
re-exports—which are goods produced in other
countries, imported into the United States,
and then re-exported to other countries, in
this case to China. Since re-exports are not
produced domestically, their production does
not support domestic employment and they are
excluded from the model used here. See Table
1 for information about the levels of U.S.
re-exports to China in this period.
5. This model assumes that
everything else is held constant and the
results are counterfactual estimates.
6. See the methodology
appendix for computational details.
7. Other studies—see
California State World Trade Commission
(1996), which finds 47,600 jobs created in
California from increased trade with Canada
alone—have allocated all employment effects
to the home state of the exporting company.
This is problematic, because the
production—along with any attendant job
effects—need not have taken place in the
exporter's state. If a California dealer
buys cars from Chrysler and sells them to
China, these studies will find job creation
in California. However, the cars are not
made in California; so the employment
effects should instead be attributed to
Michigan and other state with high levels of
auto industry production. Likewise, if the
same firm buys auto parts from China, the
loss of employment will occur in
auto-industry states, not in California.
8. Industry-specific
producer price indices are unavailable for
certain industries between 2005 and 2006. In
order to construct price deflators for all
200 BLS industries, we used a combination of
commodity PPIs and industry PPIs. For
instance, NAICS-based industry 3331 (which
maps to BLS industry 72) is composed of
agricultural, manufacturing, and mining
machinery manufacturing. To compute a price
index for this industry, a trade-weighted
average of the commodity indices for
agricultural machinery and construction
machinery was used as a proxy for the
industry PPI. Industry PPIs were used
wherever available. |
VCAP
