An Economist’s View of Trade and Job Loss

Economics
By
John R. Brock, Ph.D., Vice President

The 2016 presidential campaign has been remarkable in many ways, but one issue that stands out to economists is the anti-trade rhetoric from both major-party candidates.  Among professional economists there is a clear consensus—perhaps greater than in any area—that free trade produces net benefits for the vast majority of Americans.  In a recent Foreign Affairs article, “The Truth about Trade: What Critics Get Wrong about the Global Economy,” Dartmouth economist Douglas Irwin argues that “saying some countries ‘win’ and other countries ‘lose’ as a result of trade … portrays it as a zero-sum game.”  But economists maintain that, in the aggregate, trade is a positive-sum game benefitting both countries.  Critics of free trade, however, contend that the U.S. trade deficit was a major cause of job loss during the Great Recession.  Irwin refutes this argument by pointing out that “the U.S. [trade] deficit shrank from 5.8 percent of GDP in 2006 to 2.7 percent in 2009, but that didn’t stop the economy from hemorrhaging jobs,” as the unemployment rate rose from 4.7 percent in 2007 to 10 percent by late 2009.  In fact, historically when the economy is doing well and incomes are rising, imports of foreign goods tend to climb, leading to an increase in the trade deficit; and when the economy is contracting and incomes are falling, imports decline and the trade balance improves.  Research shows that although imports have taken some domestic jobs and exports have produced some jobs, trade is far from the most important contributor to job loss.

The main culprit, according to research by the Center for Business and Economic Research at Ball State University, is technology-driven productivity growth, which accounted for more than 85 percent of the job loss in manufacturing between 2000 and 2010.  According to this study, just 13 percent of the overall job loss resulted from trade.  MIT economist David Autor and his colleagues estimate that from 2000 to 2007, imports from China displaced almost one million manufacturing workers, not counting job gains from exports to China. We must keep this job loss in perspective. The normal U.S. labor market churn results in roughly 1.7 million layoffs every month and slightly more job gains monthly, so one million over eight years (about 10,000 per month) is hardly noticeable.  Since trade does not appear to be the prime culprit of job loss in the U.S., then protection against foreign competition would not appear an effective policy to protect jobs.  If we want more jobs, we should encourage more job skills.  Since there are over 45 million Americans who live below the poverty line and only about 135,000 apparel industry workers, Irwin asks, “Can one really justify increasing the price of clothing [which will occur with trade barriers] for 45 million low-income Americans in an effort to save the jobs of just some of the 135,000 low-wage workers in the apparel industry?”  In short, globalization is here to stay and deciding to back away from the global economy is not a promising path to prosperity.