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Rising ChinaTrade Deficit Cost One-Half Million U.S. Jobs in 2010
Howard Richman, 3/1/2011

In September, Robert Scott of the Economic Policy Institute predicted (Rising China Trade Deficit will Cost One-Half Million U.S. Jobs in 2010) that our trade deficit with China would grow by $40 billion in 2010, as compared to 2009 and that this would cost the United States a half million jobs. He was very close. The goods trade data from 2010 (service data is not yet available) shows that the deficit grew by $46.2 billion. That deficit is shown in the graph below as the area between the red and blue lines:

As a rule of thumb, we generally estimate that every American manufacturing job lost to growing trade deficits costs the United States about $100,000 in manufacturing production. So, we would estimate that $40 billion in additional trade deficit would only cost the U.S. an additional 400,000 jobs. Scott, however, uses more precise methodology and comes up with an estimate of job loss that is about 25% higher. Here's what he writes about his methodology:

While it is true that exports support jobs in the United States, it is equally true that imports displace them. The net eff ect of trade fl ows on employment is determined by changes in the trade balance. The labor content of trade is estimated here using average multipliers from Scott (2010). These estimates apply only to the growth of trade between 2009 and 2010.

They cannot be added to the job losses due to China trade for earlier periods. Nonetheless, they are an accurate refl ection of the impacts of China trade on U.S. employment and the economy in 2010. Two estimates. Two approaches are used to estimate the employment impacts of U.S.-China trade in 2010. The first is based on the average employment multiplier for the trade balance. This assumes that the trade balance for 2010 will continue to grow at the rate established in the year-to-date, as noted above. Estimate 1 shows that the $40 billion increase in the U.S. trade deficit will displace 512,000 jobs in 2010, based on the average employment multiplier for the trade balance.

Estimate 2 is based on the growth in imports and exports, and on average import and export job multipliers. U.S. imports from China tend to be much more labor intensive than U.S. exports to China. Since imports are projected to grow more rapidly than exports, this method yields a slightly larger estimate of jobs displaced due to growing trade deficits. Using import and export jobs multipliers (estimate 2) shows that 2.9 million jobs were displaced by the China trade deficit in 2009, and 3.5 million will be displaced in 2010, for a net increase of 566,000 jobs displaced.

He concludes correctly:

Currency manipulation, illegal subsidies, and other unfair trade practices have cost the United States and other countries millions of jobs. Rising trade deficits with China will cost one-half million badly needed U.S. jobs in 2010 alone. Ending currency manipulation would be good for the economies of both countries—it would reduce inflationary pressure in China and increase the real incomes of Chinese workers. And it would help rebuild demand for U.S. manufactured goods. Currency realignment can create more than 1 million U.S. jobs, at no cost to the Treasury. It can also stimulate U.S. GDP growth and reduce the U.S. budget deficit by up to $500 billion over the next six years.2 Congress should get tough with China and other currency manipulators who have refused to make the major revaluations needed to rebalance global trade flows. They are unlikely to change their ways unless threatened with substantial import tariffs. It is time for Congress to act and force the hands of the administration and Chinese currency manipulators.

When jobs are lost to trade deficits, they don't just cause unemployment, they cause a reduced median income when American workers lose productive good-paying manufacturing jobs and have to take less-productive lower-paying jobs in other sectors. There is a simple solution here. The United States could impose a WTO-legal scaled tariff to balance trade.