Just the Facts: Trade Deficits Do Not Reduce U.S. Employment

A new report from the Economic Policy Institute (EPI) begins: “The China toll deepens: Growth in the bilateral trade deficit between 2001 and 2017 cost 3.4 million U.S. jobs, with losses in every state and congressional district.”

According to EPI, “... each $1 billion in imports from another country leads to job loss—by eliminating existing jobs and preventing new job creation—as imports displace goods that otherwise would have been made in the United States by domestic workers. The net employment effect of trade depends on the changes in the trade balance.”

If this statement were correct, the government could easily create jobs by banning all imports. You don’t have to be an economist to understand that would be a disaster.

Economic Theory and Trade Deficits

The following example may help show why it’s incorrect to tie imports and trade deficits to job losses.

Suppose a foreign-made good, like a t-shirt, is less expensive than a comparable U.S.-made t-shirt. When Americans buy the less-expensive imported t-shirt, they may spend the amount they saved on other U.S.-made goods, creating American jobs. Or they may put their savings in the bank, providing additional capital to create American jobs.

The foreign t-shirt maker can use the dollars they earn from making t-shirts for American families to buy U.S. exports or to invest in the U.S. economy--for example, investing in the U.S. stock market. Either way, American jobs are created. This is a key to American economic dynamism.

In other words, it is accurate to observe that there are some costs associated with imports, but incorrect to claim that imports cause net job losses. Trade leads to the destruction of some jobs and the creation of better jobs, a process known as creative destruction.

Statistics on Trade Deficits and Employment

The facts back up the economic theory: Historically, reductions in U.S. trade deficits usually accompany reductions in job-creating economic growth.

For example, from 2008 to 2009, the U.S.-China merchandise trade deficit fell by $41 billion. The reduction in the U.S.-China trade deficit was accompanied by a loss of 5.9 million American jobs and a big increase in the U.S. unemployment rate from 5.8 percent to 9.3 percent. That’s the opposite of what should have occurred if trade deficits really destroy jobs, and it is not a scenario Americans should want to see repeated.

This view is nearly universally accepted by economists.

What Others Have Said About Trade Deficits

Larry Kudlow, Director, National Economic Council: “Trade deficits are flip side of capital inflows. Both will rise w/ pro-growth tax cuts. Good.”

2018 Economic Report of the President (Trump Administration): “To sustain a trade deficit, a country must attract foreign investment to help finance the cost of buying foreign goods. The currency provided by foreigners for investment—for example, in the form of government bonds—comes from net imports of goods and services, which is equivalent to a bilateral trade deficit.”

2015 Economic Report of the President (Obama Administration): “For advanced economies in general, bigger trade deficits are associated with stronger, not weaker, growth because they tend to reflect higher overall demand that raises imports at the same time as it raises output.”

President Ronald Reagan: “In recent years, the trade deficit led some misguided politicians to call for protectionism, warning that otherwise we would lose jobs. But they were wrong again. In fact, the United States not only didn't lose jobs, we created more jobs than all the countries of Western Europe, Canada, and Japan combined. The record is clear that when America's total trade has increased, American jobs have also increased. And when our total trade has declined, so have the number of jobs.”

Adam Smith, The Wealth of Nations: “Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its deviation from the exact equilibrium. Both suppositions are false.”

Frederic Bastiat, Economic Sophisms: “Assume, if it amuses you, that foreigners flood our shores with all kinds of useful goods, without asking anything from us; even if our imports are infinite and our exports nothing, I defy you to prove to me that we should be the poorer for it.”

Economic Policy Institute: “The Economic Policy Institute and other researchers have examined the job impacts of trade in recent years by netting the job opportunities lost to imports against those gained through exports. One criticism of these studies is that they do not try to estimate the jobs gained from capital inflows. However, this criticism misses the point of these studies: estimates of jobs displaced by growing trade deficits are not a declaration of exactly how many more jobs the economy would have today if these deficits had not grown.” (Emphasis in the original)