Trade Debate

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Please read the assignment instructions on the "Debate Paper Guidelines"

To answer this question students should only use the following readings as the primary resources in writing their papers.

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Does free trade (globalization) promote economic growth or is protectionism a better strategy to guarantee economic security?

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POLS 4133 International Political Economy Debate Paper Guidelines Spring 2017 You will evaluate the information on a contentious issue and then convince the audience that your opinion is valid and defensible. Your job is to take one side of the argument and then persuade your audience that the evidence validates your claims and refutes any counterclaims. Guidelines for the papers are as follows: 1. Students may not select alternate topics. Specific questions for each debate will be given. 2. Each paper will be a maximum of three pages of text in length, not including a cover page or a bibliography. Your text should be no more than 3 pages, double-spaced, with one-inch margins, and 12-point Times New Roman font. Your paper will be organized to include: • An introductory paragraph that describes your thesis/position statement on the topic. Your position should be clear and based on facts rather than belief or opinion. • At least two to three paragraphs giving relevant evidence to support your position. Each paragraph should focus on only one point of evidence. Paragraphs are typically organized from weakest point to strongest point. • At least one paragraph that provides a refutation of the most significant counterargument to your position. Be sure to say why the counterclaim is not supported based on facts or false logic in the claim itself. • At least one paragraph concluding your paper. To help you organize the information in your papers, you might wish to consider the following questions as you read the sources and gather your evidence. • What is the author’s main argument? What research question is the author trying to answer? What are the assumptions, explicit and implicit, upon which the author’s argument is based? • What are the strengths and weaknesses of the author’s analysis? Can you think of an alternative explanation for the author’s evidence? • Do you agree or disagree with the author? How would you approach a similar puzzle? What questions still need to be addressed? • What advice would you give to policy makers based on this reading? 3. Students must use the readings provided to them on Folio (and our course readings) to form the basis of their evidence. Students may supplement these readings with additional evidence taken from credible news sources or peer reviewed academic research. Students must cite all sources with in-text citations and include full citations in a bibliography. 1 4. Students are expected to submit papers that have been carefully edited and are free from common mistakes in spelling, grammar, and formatting. Students are expected to work individually and properly cite all sources; any student found to be engaging in academic dishonesty will receive a failing grade for this assignment. In grading your papers, I will be looking for evidence that you (a) clearly explain your thesis, (b) provide strong support of your thesis using evidence from the course, (c) provide a discussion of at least one counterclaim, (d) use concepts and themes from our course, and (e) follow writing conventions. You will also receive credit for (f) relevant and engaging class participation on the day of the debate. Grading criteria can be found in the debate paper rubric. NOTE: Failure to follow these guidelines will result in a reduction of points awarded. 2 A New Deal for Globalization 12/15/16 11:19 AM Home > A New Deal for Globalization Sunday, July 1, 2007 A New Deal for Globalization Kenneth F. Scheve and Matthew J. Slaughter Kenneth F. Scheve is Professor of Political Science at Yale University. Matthew J. Slaughter is Professor of Economics at the Tuck School of Business at Dartmouth and Adjunct Senior Fellow for Business and Globalization at the Council on Foreign Relations. He served on the White House Council of Economic Advisers from 2005 to 2007. WAGES FALLING, PROTECTIONISM RISING Over the last several years, a striking new feature of the U.S. economy has emerged: real income growth has been extremely skewed, with relatively few high earners doing well while incomes for most workers have stagnated or, in many cases, fallen. Just what mix of forces is behind this trend is not yet clear, but regardless, the numbers are stark. Less than four percent of workers were in educational groups that enjoyed increases in mean real money earnings from 2000 to 2005; mean real money earnings rose for workers with doctorates and professional graduate degrees and fell for all others. In contrast to in earlier decades, today it is not just those at the bottom of the skill ladder who are hurting. Even college graduates and workers with nonprofessional master's degrees saw their mean real money earnings decline. By some measures, inequality in the United States is greater today than at any time since the 1920s. Advocates of engagement with the world economy are now warning of a protectionist drift in public policy. This drift is commonly blamed on narrow industry concerns or a failure to explain globalization's benefits or the war on terrorism. These explanations miss a more basic point: U.S. policy is becoming more protectionist because the American public is becoming more protectionist, and this shift in attitudes is a result of stagnant or falling incomes. Public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor. Given that globalization delivers tremendous benefits to the U.S. economy as a whole, the rise in protectionism brings many economic dangers. To avert them, U.S. policymakers must recognize and then address the fundamental cause of opposition to freer trade and investment. They must also recognize that the two most commonly proposed responses -- more investment in education and more trade adjustment assistance for dislocated workers -- are nowhere near adequate. Significant payoffs from educational investment will take decades to be realized, and trade adjustment assistance is too small and too narrowly targeted on specific industries to have much effect. https://www.foreignaffairs.com/print/1110449 Page 1 of 9 A New Deal for Globalization 12/15/16 11:19 AM The best way to avert the rise in protectionism is by instituting a New Deal for globalization -- one that links engagement with the world economy to a substantial redistribution of income. In the United States, that would mean adopting a fundamentally more progressive federal tax system. The notion of more aggressively redistributing income may sound radical, but ensuring that most American workers are benefiting is the best way of saving globalization from a protectionist backlash. RISING PROTECTIONISM U.S. economic policy is becoming more protectionist. First, consider trade. The prospects for congressional renewal of President George W. Bush's trade promotion authority, which is set to expire this summer, are grim. The 109th Congress introduced 27 pieces of anti-China trade legislation; the 110th introduced over a dozen in just its first three months. In late March, the Bush administration levied new tariffs on Chinese exports of high-gloss paper -- reversing a 20year precedent of not accusing nonmarket economies of illegal export subsidies. Barriers to inward foreign direct investment (FDI) are also rising. In 2005, the Chinese energy company CNOOC tried to purchase U.S.-headquartered Unocal. The subsequent political storm was so intense that CNOOC withdrew its bid. A similar controversy erupted in 2006 over the purchase of operations at six U.S. ports by Dubai-based Dubai Ports World, eventually causing the company to sell the assets. The Committee on Foreign Investments in the United States, which is legally required to review and approve certain foreign acquisitions of U.S. businesses, has raised the duration and complexity of many reviews. Both chambers of the 109th Congress passed bills to tighten CFIUS scrutiny even further; similar legislation has already passed in the current House. This protectionist drift extends to much of the world. The Doha Development Round of trade negotiations, the centerpiece of global trade liberalization, is years behind schedule and now on the brink of collapse. Key U.S. trading partners are becoming increasingly averse to foreign investment, as expressed both in their rhetoric (recent public pronouncements by the governments of France and Germany) and in their actions (new restrictions in China on foreign retailers). At first glance, this rise in protectionism may seem puzzling. The economic gains from globalization are immense. In the United States, according to estimates from the Peter G. Peterson Institute for International Economics and others, trade and investment liberalization over the past decades has added between $500 billion and $1 trillion in annual income -between $1,650 and $3,300 a year for every American. A Doha agreement on global free trade in goods and services would generate, according to similar studies, $500 billion a year in additional income in the United States. International trade and investment have spurred productivity growth, the foundation of rising average living standards. The rate of increase in output per worker hour in the U.S. nonfarm business sector has doubled in the past decade, from an annual average of 1.35 percent between 1973 and 1995 to an annual average of 2.7 percent since 1995. Much of the initial acceleration was related to information technology (IT) -- one of the United States' most globally engaged industries, at the forefront of establishing and expanding production networks linked by trade and investment around the globe. https://www.foreignaffairs.com/print/1110449 Page 2 of 9 A New Deal for Globalization 12/15/16 11:19 AM Gains from globalization have been similarly large in the rest of the world. China and India have achieved stupendous rates of productivity growth, lifting hundreds of millions of people out of poverty. Central to this success has been the introduction of market forces, in particular international market forces related to trade and FDI. In Chinese manufacturing, foreign multinational companies account for over half of all exports. And in the Indian IT sector, Indian and foreign multinational firms account for two-thirds of sales. Freer trade and investment can also enhance other foreign policy goals. The Doha Round was launched shortly after 9/11 because of the view that global poverty is intimately linked to international insecurity and instability. The Doha Round was also intended to remedy the widespread perception that previous rounds of trade negotiations had treated poor nations unfairly by failing to open the very sectors -- such as agriculture -- whose openness would most likely help the world's poor. Accordingly, it is believed that a successful Doha agreement would enhance the United States' image and promote its interests around the world. There are three common explanations for why protectionism is on the rise in the United States even though globalization is good for both the U.S. economy and U.S. security interests. None, however, is convincing. The first is that a narrow set of industries, such as agriculture and apparel manufacturing, have been harmed by freer trade and, in response, have lobbied hard to turn lawmakers against liberalization. But the incentives for these industries to oppose globalization have not changed in recent years, and there are also many industries that have benefited from, and thus lobbied for, further liberalization. What is new today is that specialinterest protectionists are facing a more receptive audience. The second explanation is that policymakers and the business community have failed to adequately explain the benefits of freer trade and investment to the public. But in fact, publicopinion data show the opposite: large majorities of Americans acknowledge these broad benefits. If anything, the public seems to understand certain benefits better than ever -- for example, that its enjoyment of relatively affordable toys, DVD players, and other products depends on globalization. Finally, there is the security explanation: that the need to balance economic interests with national security concerns has resulted in a more protectionist stance. This may help explain policy debates on certain issues, such as immigration. But generally, security concerns strengthen rather than weaken the case for further trade and investment liberalization, as long as such liberalization is viewed as fair to the developing world. THE ROOTS OF PROTECTIONISM The fundamental explanation is much simpler: policy is becoming more protectionist because the public is becoming more protectionist, and the public is becoming more protectionist because incomes are stagnating or falling. The integration of the world economy has boosted productivity and wealth creation in the United States and much of the rest of the world. But within many countries, and certainly within the United States, the benefits of this integration have been unevenly distributed -- and this fact is increasingly being recognized. Individuals are asking themselves, "Is globalization good for me?" and, in a growing number of cases, arriving at the conclusion that it is not. https://www.foreignaffairs.com/print/1110449 Page 3 of 9 A New Deal for Globalization 12/15/16 11:19 AM This account of rising protectionism depends on two key facts. First, there is a strong link between individuals' labor-market interests and their policy opinions about globalization. Second, in the past several years labor-market outcomes have become worse for many more Americans - and globalization is plausibly part of the reason for this poor performance. Research on polling data shows that opinions about trade, FDI, and immigration are closely correlated to skill and educational levels. Less skilled Americans -- who make up the majority of the U.S. labor force -- have long led opposition to open borders. Workers with only high school educations are almost twice as likely to support protectionist policies as workers with college educations are. This divide in opinion according to skill level reflects the impact that less skilled Americans expect market liberalization to have on their earnings. It also reflects their actual poor real and relative earnings performance in recent decades. It is now well established that income inequality across skill levels has been rising since (depending on the measure) the mid- to late 1970s and that the benefits of productivity gains over this time accrued mainly to higher-skilled workers. For example, from 1966 to 2001, the median pretax inflation-adjusted wage and salary income grew just 11 percent -- versus 58 percent for incomes in the 90th percentile and 121 percent for those in the 99th percentile. Forces including skill-biased technological change played a major role in these income trends; the related forces of globalization seem to have played a smaller role -- but a role nonetheless. There are two important points about this link between policy opinions and labor-market skills and performance. One is that it does not simply reflect different understandings of the benefits of globalization. Polling data are very clear here: large majorities of Americans acknowledge the many benefits of open borders -- lower prices, greater product diversity, a competitive spur to firms -- which are also highlighted by academics, policymakers, and the business community. At the same time, they perceive that along with these benefits, open borders have put pressures on worker earnings. Second, a worker's specific industry does not appear to drive his view of globalization. This is because competition in the domestic labor market extends the pressures of globalization beyond trade- and foreign-investment-exposed industries to the entire economy. If workers in a sector such as automobile manufacturing lose their jobs, they compete for new positions across sectors -- and thereby put pressure on pay in the entire economy. What seems to matter most is what kind of worker you are in terms of skill level, rather than what industry you work in. The protectionist drift also depends on worsening labor-market outcomes over the past several years. By traditional measures, such as employment growth and unemployment rates, the U.S. labor market has been strong of late. Today, with unemployment at 4.5 percent, the United States is at or near full employment. But looking at the number of jobs misses the key change: for several years running, wage and salary growth for all but the very highest earners has been poor, such that U.S. income gains have become extremely skewed. Of workers in seven educational categories -- high school dropout, high school graduate, some college, college graduate, nonprofessional master's, Ph.D., and M.B.A./J.D./M.D. -- only those in the last two categories, with doctorates or professional graduate degrees, experienced any growth in mean real money earnings between 2000 and 2005. Workers in these two categories https://www.foreignaffairs.com/print/1110449 Page 4 of 9 A New Deal for Globalization 12/15/16 11:19 AM comprised only 3.4 percent of the labor force in 2005, meaning that more than 96 percent of U.S. workers are in educational groups for which average money earnings have fallen. In contrast to in earlier decades, since 2000 even college graduates and those with nonprofessional master's degrees -- 29 percent of workers in 2005 -- suffered declines in mean real money earnings. The astonishing skewness of U.S. income growth is evident in the analysis of other measures as well. The growth in total income reported on tax returns has been extremely concentrated in recent years: the share of national income accounted for by the top one percent of earners reached 21.8 percent in 2005 -- a level not seen since 1928. In addition to high labor earnings, income growth at the top is being driven by corporate profits, which are at nearly 50-year highs as a share of national income and which accrue mainly to those with high labor earnings. The basic fact is clear: the benefits of strong productivity growth in the past several years have gone largely to a small set of highly skilled, highly compensated workers. Economists do not yet understand exactly what has caused this skewed pattern of income growth and to what extent globalization itself is implicated, nor do they know how long it will persist. Still, it is plausible that there is a connection. Poor income growth has coincided with the integration into the world economy of China, India, and central and eastern Europe. The IT revolution has meant that certain workers are now facing competition from the overseas outsourcing of jobs in areas such as business services and computer programming. Even if production does not move abroad, increased trade and multinational production can put pressure on incomes by making it easier for firms to substitute foreign workers for domestic ones. These twin facts -- the link between labor-market performance and opinions on globalization and the recent absence of real income growth for so many Americans -- explain the recent rise in protectionism. Several polls of U.S. public opinion show an alarming rise in protectionist sentiment over the past several years. For example, an ongoing NBC News/Wall Street Journal poll found that from December 1999 to March 2007, the share of respondents stating that trade agreements have hurt the United States increased by 16 percentage points (to 46 percent) while the "helped" share fell by 11 points (to just 28 percent). A 2000 Gallup poll found that 56 percent of respondents saw trade as an opportunity and 36 percent saw it as a threat; by 2005, the percentages had shifted to 44 percent and 49 percent, respectively. The March 2007 NBC News/Wall Street Journal poll found negative assessments of open borders even among the highly skilled: only 35 percent of respondents with a college or higher degree said they directly benefited from the global economy. Given the lack of recent real income growth for most Americans, newfound skepticism about globalization is not without cause. Nor is it without effect: the change in public opinion is the impetus for the protectionist drift in policy. Politicians have an incentive to propose and implement protectionist policies because more citizens want them, and protectionist special interests face an audience of policymakers more receptive to their lobbying efforts than at any time in the last two decades. INADEQUATE ADJUSTMENTS Because the protectionist drift reflects the legitimate concerns of a now very large majority of Americans, the policy debate needs fresh thinking. There is reason to worry even if one does not care about social equity. When most workers do not see themselves as benefiting from the https://www.foreignaffairs.com/print/1110449 Page 5 of 9 A New Deal for Globalization 12/15/16 11:19 AM related forces of globalization and technology, the resulting protectionist drift may end up eliminating the gains from globalization for everybody. Current ignorance about the exact causes of the skewed income growth is not reason for inaction. Policymakers may not be able to attack the exact source (or sources) and likely would not want to even if they could identify them, because doing so could reduce or even eliminate the aggregate gains from globalization. Supporters of globalization face a stark choice: shore up support for an open global system by ensuring that a majority of workers benefit from it or accept that further liberalization is no longer sustainable. Given the aggregate benefits of open borders, the preferable option is clear. Current policy discussions addressing the distributional consequences of globalization typically focus on the main U.S. government program for addressing the labor-market pressures of globalization -- Trade Adjustment Assistance (TAA) -- and on investing more in education. These ideas will help but are inadequate for the problem at hand. The problem with TAA is that it incorrectly presumes that the key issue is transitions across jobs for workers in trade-exposed industries. Established in the Trade Act of 1974 (with a related component connected to the North American Free Trade Agreement), the program aids groups of workers in certain industries who can credibly claim that increased imports have destroyed their jobs or have reduced their work hours and wages. TAA-certified workers can access supports including training, extended unemployment benefits while in full-time training, and jobsearch and relocation allowances. In short, TAA is inappropriately designed to address the protectionist drift. The labor-market concern driving this drift is not confined to the problem of how to reemploy particular workers in particular sectors facing import competition. Because the pressures of globalization are spread economy-wide via domestic labor-market competition, there is concern about income and job security among workers employed in all sectors. Today many are calling for reform and expansion of TAA. For example, President Bush has proposed streamlining the processes of eligibility determination and assistance implementation to facilitate reemployment. This year, TAA is due to be reauthorized by Congress, and many legislators have proposed broadening the number of industries that are TAA-eligible. TAA improvements like these are surely welcome. But they alone cannot arrest the protectionist drift. The idea behind investing in education is that higher-skilled workers generally earn more and are more likely to directly benefit from economic openness. The problem with this approach, however, is that upgrading skills is a process that takes generations -- its effects will come far too late to address today's opposition to globalization. It took 60 years for the United States to boost the share of college graduates in the labor force from six percent (where it was at the end of World War II) to about 33 percent (where it is today). And that required major government programs, such as the GI Bill, and profound socioeconomic changes, such as increased female labor-force participation. If the United States today undertook the goal of boosting its college-graduate share of the work force to 50 percent, the graduation of that median American worker would, if the rate of past efforts are any indication, not come until about 2047. And even this far-off date might be too optimistic. In the past generation, the rate of increase in the educational attainment of U.S. https://www.foreignaffairs.com/print/1110449 Page 6 of 9 A New Deal for Globalization 12/15/16 11:19 AM natives has slowed from its 1960s and 1970s pace, in part because college-completion rates have stalled. Rising income inequality may itself be playing a role here. Since 1988, 74 percent of American students at the 146 top U.S. colleges have come from the highest socioeconomic quartile, compared with just 3 percent from the lowest quartile. Moreover, even college graduates and holders of nonprofessional master's degrees have experienced falling mean real money earnings since 2000. If this trend continues, even completing college will not assuage the concerns behind rising protectionism. GLOBALIZATION AND REDISTRIBUTION Given the limitations of these two reforms and the need to provide a political foundation for engagement with the world economy, the time has come for a New Deal for globalization -- one that links trade and investment liberalization to a significant income redistribution that serves to share globalization's gains more widely. Recall that $500 billion is a common estimate of the annual income gain the United States enjoys today from earlier decades of trade and investment liberalization and also of the additional annual income it would enjoy as a result global free trade in goods and services. These aggregate gains, past and prospective, are immense and therefore immensely important to secure. But the imbalance in recent income growth suggests that the number of Americans not directly sharing in these aggregate gains may now be very large. Truly expanding the political support for open borders requires a radical change in fiscal policy. This does not, however, mean making the personal income tax more progressive, as is often suggested. U.S. taxation of personal income is already quite progressive. Instead, policymakers should remember that workers do not pay only income taxes; they also pay the FICA (Federal Insurance Contributions Act) payroll tax for social insurance. This tax offers the best way to redistribute income. The payroll tax contains a Social Security portion and a Medicare portion, each of which is paid half by the worker and half by the employer. The overall payroll tax is a flat tax of 15.3 percent on the first $94,200 of gross income for every worker, with an ongoing 2.9 percent flat tax for the Medicare portion beyond that. Because it is a flat-rate tax on a (largely) capped base, it is a regressive tax -- that is, it tends to reinforce rather than offset pretax inequality. At $760 billion in 2005, the regressive payroll tax was nearly as big as the progressive income tax ($1.1 trillion). Because it is large and regressive, the payroll tax is an obvious candidate for meaningful income redistribution linked to globalization. A New Deal for globalization would combine further trade and investment liberalization with eliminating the full payroll tax for all workers earning below the national median. In 2005, the median total money earnings of all workers was $32,140, and there were about 67 million workers at or below this level. Assuming a mean labor income for this group of about $25,000, these 67 million workers would receive a tax cut of about $3,800 each. Because the economic burden of this tax falls largely on workers, this tax cut would be a direct gain in after-tax real income for them. With a total price tag of about $256 billion, the proposal could be paid for by raising the cap of $94,200, raising payroll tax rates (for progressivity, rates could escalate as they do with the income tax), or some combination of the two. This is, of course, only an outline of the needed policy reform, and there would be many implementation details to address. For example, rather than a single on-off point for this tax cut, a phase-in of it (like with the earned-income tax credit) would avoid incentive-distorting jumps in effective tax rates. https://www.foreignaffairs.com/print/1110449 Page 7 of 9 A New Deal for Globalization 12/15/16 11:19 AM This may sound like a radical proposal. But keep in mind the figure of $500 billion: the annual U.S. income gain from trade and investment liberalization to date and the additional U.S. gain a successful Doha Round could deliver. Redistribution on this scale may be required to overcome the labor-market concerns driving the protectionist drift. Determining the right scale and structure of redistribution requires a thoughtful national discussion among all stakeholders. Policymakers must also consider how exactly to link such redistribution to further liberalization. But this should not obscure the essential idea: to be politically viable, efforts for further trade and investment liberalization will need to be explicitly linked to fundamental fiscal reform aimed at distributing globalization's aggregate gains more broadly. SAVING GLOBALIZATION Averting a protectionist backlash is in the economic and security interests of the United States. Globalization has generated -- and can continue to generate -- substantial benefits for the United States and the rest of the world. But realizing those broad benefits will require addressing the legitimate concerns of U.S. voters by instituting a New Deal for globalization. In many ways, today's protectionist drift is similar to the challenges faced by the architect of the original New Deal. In August 1934, President Franklin Roosevelt declared: Those who would measure confidence in this country in the future must look first to the average citizen. . . . This Government intends no injury to honest business. The processes we follow in seeking social justice do not, in adding to general prosperity, take from one and give to another. In this modern world, the spreading out of opportunity ought not to consist of robbing Peter to pay Paul. In other words, we are concerned with more than mere subtraction and addition. We are concerned with multiplication also -- multiplication of wealth through cooperative action, wealth in which all can share. Today, such multiplication will depend on striking a delicate balance -- between allowing globally engaged companies to continue to generate large overall gains for the United States and using well-targeted fiscal mechanisms to spread the gains more widely. Would addressing concerns about income distribution make voters more likely to support open borders? The public-opinion data suggest that the answer is yes. Americans consistently say that they would be more inclined to back trade and investment liberalization if it were linked to more support for those hurt in the process. The policy experience of other countries confirms this point: there is greater support for engagement with the world economy in countries that spend more on programs for dislocated workers. U.S. policymakers face a clear choice. They can lead the nation down the dangerous path of creeping protectionism. Or they can build a stable foundation for U.S. engagement with the world economy by sharing the gains widely. A New Deal for globalization can ensure that globalization survives. Copyright © 2016 by the Council on Foreign Relations, Inc. All rights reserved. To request permission to distribute or reprint this article, please fill out and https://www.foreignaffairs.com/print/1110449 Page 8 of 9 A New Deal for Globalization 12/15/16 11:19 AM submit a Permissions Request Form. If you plan to use this article in a coursepack or academic website, visit Copyright Clearance Center to clear permission. Source URL: https://www.foreignaffairs.com/articles/2007-07-01/new-deal-globalization https://www.foreignaffairs.com/print/1110449 Page 9 of 9 E P I BR I EFING PAPER E C O N O M I C P O L I C Y I N S T I T U T E • A U G U S T 2 3 , 2 0 1 2 • B R I E F I N G PA P E R # 3 4 5 THE CHINA TOLL Growing U.S. trade deficit with China cost more than 2.7 million jobs between 2001 and 2011, with job losses in every state BY ROBERT E. SCOT T S ince China entered the World Trade Organization in 2001, the extraordinary growth of trade between China and the United States has had a dramatic effect on U.S. workers and the domestic economy, though in neither case has this effect been beneficial. The United States is piling up foreign debt and losing export capacity, and the growing trade deficit with China has been a prime contributor to the crisis in U.S. manufacturing employment. Between 2001 and 2011, the trade deficit with China eliminated or displaced more than 2.7 million U.S. jobs, over 2.1 million of which (76.9 percent) were in manufacturing. These lost manufacturing jobs account for more than half of all U.S. manufacturing jobs lost or displaced between 2001 and 2011. The more than 2.7 million jobs lost or displaced in all sectors include 662,100 jobs from 2008 to 2011 alone—even though imports from China and the rest of the world plunged in 2009. (Imports from China have since recovered and surpassed their peak of 2008.) The growing trade deficit with China has cost jobs in all 50 states and the District of Columbia and Puerto Rico, as well as in each congressional district. Among specific industries, the trade deficit in the computer and electronic products industry grew the most, and 1,064,800 jobs were displaced, 38.8 percent of the 2001–2011 total. As a result, many of the hardest-hit congressional districts were in California, Texas, Oregon, Massachusetts, Colorado, and Minnesota, where jobs in that industry are concentrated. Some districts in North Carolina, Georgia, and Alabama were also especially hardhit by job displacement in a variety of manufacturing industries, including computers and electronic products, textiles and apparel, and furniture. ECONOMIC POLICY INSTITUTE • 1333 H STREET, NW • SUITE 300, EAST TOWER • WASHINGTON, DC 20005 • 202.775.8810 • WWW.EPI.ORG But the jobs impact of the China trade deficit is not restricted to job loss and displacement. Competition with low-wage workers from less-developed countries such as China has driven down wages for workers in U.S. manufacturing and reduced the wages and bargaining power of similar, non-college-educated workers throughout the economy. The affected population includes essentially all workers with less than a four-year college degree—roughly 70 percent of the workforce, or about 100 million workers (U.S. Census Bureau 2012b). Put another way, for a typical full-time median-wage earner, earnings losses due to globalization totaled approximately $1,400 per year as of 2006 (Bivens 2008a). For a typical household with two earners, the annual cost is more than $2,500. China is the most important source of downward wage pressure from trade with less-developed countries because it pays very low wages and because its products make up such a large portion of U.S. imports (China was responsible for 55.3 percent of U.S. non-oil imports from less-developed countries in 2011). These conclusions about the jobs impact of trade with China arise from the following specific findings of this study: Most of the jobs lost or displaced by trade with China between 2001 and 2011 were in manufacturing industries (more than 2.1 million jobs, or 76.9 percent). Within manufacturing, rapidly growing imports of computer and electronic products (including computers, parts, semiconductors, and audio-video equipment) accounted for 54.9 percent of the $217.5 billion increase in the U.S. trade deficit with China between 2001 and 2011. The growth of this deficit contributed to the elimination of 1,064,800 U.S. jobs in computer and electronic products in this period. Indeed, in 2011, the total U.S. trade deficit with China was $301.6 billion—$139.3 billion of which was in computer and electronic products. E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 Global trade in advanced technology products—often discussed as a source of comparative advantage for the United States—is instead dominated by China. This broad category of high-end technology products includes the more advanced elements of the computer and electronic products industry as well as other sectors such as biotechnology, life sciences, aerospace, and nuclear technology. In 2011, the United States had a $109.4 billion deficit in advanced technology products with China, which was responsible for 36.3 percent of the total U.S.-China trade deficit. In contrast, the United States had a $9.7 billion surplus in advanced technology products with the rest of the world in 2011. Other industrial sectors hit hard by growing trade deficits with China between 2001 and 2011 include apparel and accessories (211,200 jobs), textile mills and textile product mills (106,200), fabricated metal products (120,600), furniture and fixtures (80,700), plastics and rubber products (57,600), motor vehicles and parts (19,800), and miscellaneous manufactured goods (111,800). Several service sectors were also hit hard by indirect job losses, including administrative, support, and waste management services (160,600) and professional, scientific, and technical services (145,000). The more than 2.7 million U.S. jobs lost or displaced by the trade deficit with China between 2001 and 2011 were distributed among all 50 states, the District of Columbia, and Puerto Rico, with the biggest net losses occurring in California (474,700 jobs), Texas (239,600), New York (158,800), Illinois (113,700), North Carolina (110,300), Florida (106,100), Pennsylvania (101,200), Ohio (95,900), Massachusetts (92,700), and Georgia (87,300). Jobs displaced due to growing deficits with China equaled or exceeded 2.2 percent of total employment in the 12 hardest-hit states: New Hampshire (20,400 jobs lost or displaced, equal to 2.94 percent of total state employment), California (474,700, 2.87 perPAGE 2 cent), Massachusetts (92,700, 2.86 percent), Oregon (50,200, 2.85 percent), North Carolina (110,300, 2.67 percent), Minnesota (72,300, 2.66 percent), Idaho (18,200, 2.65 percent), Vermont (8,000, 2.43 percent), Colorado (57,800, 2.38 percent), Texas (239,600, 2.26 percent), Rhode Island (11,800, 2.24 percent), and Alabama (43,900, 2.20 percent). The hardest-hit congressional districts were concentrated in states that were heavily exposed to growing China trade deficits in computer and electronic products and other industries such as furniture, textiles, apparel, and durable goods manufacturing. The three hardest-hit congressional districts were all located in Silicon Valley in California, including the 15th (Santa Clara County, which lost 44,700 jobs, equal to 13.77 percent of all jobs in the district), the 14th (Palo Alto and nearby cities, 32,700 jobs, 10.20 percent), and the 16th (San Jose and other parts of Santa Clara County, 29,000 jobs, 9.55 percent). Of the top 20 hardest-hit districts, seven were in California (in rank order, the 15th, 14th, 16th, 13th, 31st, 34th, and 50th), four were in Texas (31st, 10th, 25th, and 3rd), two were in North Carolina (4th and 10th), two were in Massachusetts (5th and 3rd), and one each in Oregon (1st), Georgia (9th), Colorado (4th), Minnesota (1st), and Alabama (5th). Each of these districts lost at least 11,400 jobs, or more than 3.7 percent of its total jobs. The job displacement estimates in this study are conservative. They include only the direct and indirect jobs displaced by trade, and exclude jobs in domestic wholesale and retail trade or advertising; they also exclude re-spending employment.1 However, during the Great Recession of 2007–2009, and continuing through 2011, jobs displaced by China trade reduced wages and spending, which led to further job losses. E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 Introduction: High expectations attended China’s entry into the WTO Today’s international trading system grew out of the Bretton Woods Agreements negotiated among Allied nations in July 1944. Bretton Woods established rules for financial relations among signatories and established the International Monetary Fund and the World Bank. A subsequent U.N. Conference on Trade and Employment produced the General Agreement on Tariffs and Trade (GATT) in 1947. The GATT treaty established the international trading system, which evolved as a series of global trade negotiations that refined the rules of the system while progressively lowering tariffs and non-tariff barriers. The Uruguay Round, which lasted from September 1986 until December 1993, led to the 1994 creation of the World Trade Organization, an institution charged with settling disagreements among nations regarding the rules agreed upon in GATT. The World Trade Organization was empowered to engage in dispute resolution and to authorize imposition of offsetting duties if its decisions were ignored or rejected by member governments. It expanded the trading system’s coverage to include a huge array of subjects never before included in trade agreements, such as food safety standards, environmental laws, social service policies, intellectual property standards, government procurement rules, and more (Wallach and Woodall 2011). Over time, countries that were not part of the original GATT group have sought entry into the WTO to gain improved market access for their goods at lower tariff levels, and to encourage development of their traded goods industries. 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. In 2000, President Clinton claimed that the agreement then being negotiated to allow China into the PAGE 3 WTO “creates a win-win result for both countries.” Exports to China “now support hundreds of thousands of American jobs,” and these figures “can grow substantially with the new access to the Chinese market the WTO agreement creates,” he said (Clinton 2000, 9–10). the United States’ widening trade deficit with China is costing U.S. jobs. China’s entry into the WTO in 2001 was supposed to bring it into compliance with an enforceable, rules-based regime that would require China to open its markets to imports from the United States and other nations by reducing tariffs and addressing non-tariff barriers to trade. Promoters of liberalized U.S.-China trade argued that the United States would benefit because of increased exports to a large and growing consumer market in China. The United States also negotiated a series of special safeguard measures designed to limit the disruptive effects of surging imports from China on domestic producers. A major cause of the rapidly growing U.S. trade deficit with China is currency manipulation. Unlike other currencies, the Chinese yuan does not fluctuate freely against the dollar.2 Instead, China has tightly pegged its currency to the U.S. dollar at a rate that encourages a large bilateral trade surplus with the United States. However, as a result of China’s currency manipulation and other trade-distorting practices, including extensive subsidies, legal and illegal barriers to imports, dumping, and suppression of wages and labor rights, the envisioned flow of U.S. exports to China did not occur. Further, the agreement spurred foreign direct investment in Chinese enterprises, which has expanded China’s manufacturing sector at the expense of the United States. Finally, the core of the agreement failed to include any protections to maintain or improve labor or environmental standards or to prohibit currency manipulation. In retrospect, the promises about jobs and exports misrepresented the real effects of trade on the U.S. economy: Trade leads to both job creation and job loss or displacement. (This paper describes the net effect of trade on employment as jobs “lost or displaced,” with the terms “lost” and “displaced” used interchangeably.) Increases in U.S. exports tend to create jobs in the United States, but increases in imports will lead to job loss—by destroying existing jobs and preventing new job creation—as imports displace goods that otherwise would have been made in the United States by domestic workers. This is what has occurred with China since it entered the WTO; E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 Currency manipulation is a major cause of the trade deficit As China’s productivity has soared, its currency should have adjusted, increasing in value to maintain balanced trade. But the yuan has instead remained artificially low as China has aggressively acquired dollars and other foreign exchange reserves to further depress the value of its own currency. (To depress the value of its own currency, a government can sell its own currency and buy government securities such as U.S. Treasury bills, which increases its foreign reserves.) China had to purchase $337 billion in U.S. Treasury bills and other securities between December 2010 and December 2011 alone to maintain the peg to the U.S. dollar (International Monetary Fund 2012a). As of June 30, 2012, China held a total of $3.24 trillion in foreign exchange reserves (Bloomberg News 2012), about 70 percent of which were held in U.S. dollars. This intervention makes the yuan artificially cheap relative to the dollar, effectively subsidizing Chinese exports. Although the yuan has appreciated significantly since 2005, economist H.W. Brock (2012) estimates that the Chinese currency is still massively undervalued, and is “arguably one-sixth of what it should be” (Miller 2012).3 New research by Joe Gagnon (2012, 3) estimates that massive currency manipulation, especially by countries in Asia, has raised “the current account of the developing economies by roughly $700 billion [per year], relative to what it would have been.” Gagnon also notes that this “amount is roughly equivalent to the large output gaps in the United States and euro area. In other words, milPAGE 4 lions more Americans and Europeans would be employed if other countries did not manipulate their currencies…” (Gagnon 2012, 1). China is the single most important currency manipulator, based on both its massive currency intervention over the past decade and its share of global current account surpluses.4 Currency intervention artificially raises the cost of U.S. exports to China and the rest of the world by a similar amount, making U.S. goods less competitive in that country and in every country where U.S. exports compete with Chinese goods. This is because China is the most important competitor for the United States in all other third country markets, even more important than Germany and all other members of the European Union combined. China’s currency manipulation has compelled other countries to follow similar policies in order to protect their relative competitiveness and to promote their own exports. Widespread currency manipulation has also contributed to the growth of very large global current account imbalances (a country’s current account balance is the broadest measure of its trade balance; there are currently many countries with large surpluses or deficits). Gagnon recommends that the rules of the WTO be changed to allow countries to impose tariffs on imports from currency manipulators. Since changing the rules of the WTO requires unanimous consent of all members, Gagnon observes that “the main targets of currency manipulation—the United States and euro area—may have to play tough. One strategy would be to tax or otherwise restrict purchases of U.S. and euro area financial assets by currency manipulators” (Gagnon 2012, 1). Such financial taxes would be “consistent with international law” (Gagnon 2011). A recent report showed that full revaluation of the yuan and other undervalued Asian currencies would improve the U.S. current account balance by up to $190.5 billion, thereby increasing U.S. GDP by as much as $285.7 billion, adding up to 2.25 million U.S. jobs, and reducing the federal budget deficit by up to $857 billion over 10 E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 years (Scott 2011a). Revaluation would also help workers in China and other Asian countries by reducing inflationary overheating and increasing workers’ purchasing power. It would also benefit other countries. The undervaluation of the yuan has put the burden of global current account realignment pressures on other countries such as Australia, New Zealand, South Africa, and Brazil, along with members of the euro area, whose currencies have also become overvalued with respect to those of China and other currency manipulators. Policy remedies available to address currency manipulation A growing number of economists, workers, members of Congress, businesses, and communities are calling for increased action on currency manipulation. The RyanMurphy Currency Reform for Fair Trade Act (H.R. 2378) was approved by the House of Representatives on September 29, 2010 (OpenCongress.org 2012), near the end of the 111th Congress.5 It received an 80 percent approval margin, with a vote of 348–79, with six abstentions. In the 112th Congress, the Senate passed a similar bill, the Currency Exchange Rate Oversight Reform Act of 2011 (S. 1619), authored by Sen. Sherrod Brown (D-Ohio), by a margin of 63–25 (Thomas 2012). A similar measure was introduced in the House in 2011 by Rep. Sander Levin with 234 cosponsors, but it is being held up by the House leadership. These bills would revise the Tariff Act of 1930 to include a “countervailable subsidy” that would allow tariffs to be imposed on some imports from countries with a “fundamentally undervalued currency.” There is strong bipartisan support for such legislation in Congress. Recently, a number of economists have condemned currency manipulation and developed innovative policy proposals for combating it. Paul Krugman has denounced China for its “predatory” trade policies (Krugman 2010). Fred Bergsten has described China’s currency intervention PAGE 5 as the “largest protection measure adopted by any country since the Second World War—and probably in all of history” (Palmer 2011). Joseph Gagnon and Gary Hufbauer (2011) have developed a proposal for taxing Chinese assets in the United States. They recommend withholding a share of the proceeds of interest payments on U.S. Treasury securities held by China’s central bank. There are two problems with this proposal. First, since interest rates on U.S. securities are very low at present, a tax would have little impact on China. But the fundamental problem is that China is not holding and purchasing U.S. assets (at a rate of about $1 billion per day) to earn interest on these investments; these purchases are made simply to suppress the value of the Chinese yuan. Daniel Gros (2010) has developed an innovative, alternative proposal that goes directly to the mechanism of currency manipulation. He recommends that the United States, Japan, and European countries “invoke the [WTO] principle of reciprocity and declare that they will limit sales of public debt henceforth to only include official institutions from countries in which they, themselves, are allowed to buy and hold public debt.” Since China maintains strict capital controls, other central banks are not allowed to buy or hold Chinese debt (which is in part why China is able to manipulate the value of its currency). Gros would simply outlaw Chinese purchases of U.S. debt. Gros (2010) asserts, “No reputable financial institution would dare to become a hidden intermediary for the Chinese…as it would have to certify to the U.S. authorities that the beneficial owner is not from a country in which foreigners cannot buy and hold public debt.” Gros notes that this form of capital control is “perfectly legal” under IMF rules because, “in contrast to the area of trade, there are no legal constraints on the impositions of capital controls.” 6 Gagnon (2011) estimates that many developing countries are manipulating their currencies. IMF data show that foreign central banks are spending about $1.2 trillion per year buying foreign exchange reserves, with China mak- E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 ing about half the purchases (according to the author’s analysis of IMF 2012a). These figures exclude sovereign wealth funds (SWFs), which many countries use to make investments in other countries; although Gagnon acknowledges that “foreign investment by SWFs clearly is currency manipulation,” he excludes it from his calculations “for now” (Gagnon 2012, 4). Gagnon (2011) estimates that U.S. net exports are $400 billion lower than they would be without currency manipulation, a figure that would support three million or more jobs per year. Other illegal laws, regulations, and policies are also responsible for the large U.S. trade deficit with China Currency manipulation is one practice that violates the rules of the international trading system set out in the GATT and WTO agreements (Stewart and Drake 2010). Other Chinese government policies also illegally encourage exports. China extensively suppresses labor rights, which lowers production costs within China. An AFLCIO study estimated that repression of labor rights by the Chinese government has lowered manufacturing wages of Chinese workers by 47 percent to 86 percent (AFLCIO, Cardin, and Smith 2006, 138). China also provides massive direct export subsidies to many key industries (see, for example, Haley 2008, 2009, 2012). Finally, it maintains strict, non-tariff barriers to imports. As a result, China’s $398.5 billion of exports to the United States in 2011 were more than four times greater than U.S. exports to China, which totaled only $96.9 billion (Table 1), making the China trade relationship the United States’ most imbalanced by far. Partly because the agreement accepting China into the WTO failed to include any protections to maintain or improve labor or environmental standards, China’s entry has further tilted the international economic playing field against U.S. domestic workers and firms and in favor of multinational companies from the United States and PAGE 6 TA B L E 1 U.S.-China trade and job displacement, 2001–2011 CHANGE ($BILLIONS) 2001 2008 2011 2001–2011 2008–2011 PERCENT CHANGE 2001–2011 U.S. trade with China ($billions, nominal) U.S. domestic exports* 18.0 67.2 96.9 78.9 29.7 439.6% U.S. imports for consumption 102.1 337.5 398.5 296.4 61.0 290.4% U.S. trade balance -84.1 -270.3 -301.6 -217.5 -31.2 258.5% -21.7 -10.4 13.6% Average annual change in the trade balance CHANGE (THOUSANDS OF JOBS) PERCENT CHANGE U.S. trade-related jobs supported and displaced (thousands of jobs) U.S. domestic exports-jobs supported 169.4 547.9 707.4 538.0 159.5 317.7% U.S. imports for consumption-jobs displaced 1,139.5 3,598.1 4,419.7 3,280.2 821.6 287.9% U.S. trade deficit-net jobs displaced 970.1 3,050.2 3,712.3 2,742.2 662.1 282.7% 274.2 220.7 14.4% Average annual change in net jobs displaced * Domestic exports are goods produced in the United States and exclude re-exports, i.e., goods produced in other countries and shipped through the United States. Total exports as reported by the U.S. International Trade Commission include re-exports. Total exports were estimated to be $103.9 billion in 2011, and U.S. re-exports to China represent 6.72% of total exports. The employment estimates shown here are based on domestic exports only. See endnotes nine and 10 for additional details. Source: Author’s analysis of U.S. Census Bureau (2009), U.S. International Trade Commission (2012), and Bureau of Labor Statistics Office of Employment Projections (2011a and 2011b). For a more detailed explanation of data sources and computations, see the Appendix. other countries, as well as state- and privately owned exporters in China. This shift has accelerated the global “race to the bottom” in wages and environmental quality and closed thousands of U.S. factories, decimating employment in a wide range of communities, states, and entire regions of the United States. U.S. national interests have suffered while U.S. multinationals have enjoyed record profits on their foreign direct investments (Scott 2007, 2011b). E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 Some actions have recently been taken in response. In September 2009, the Obama administration announced that it would take action to restrict imports of Chinese tires for three years under the special safeguard measures, the first time since 2001 that these measures had been utilized. In September 2010, the United Steelworkers (USW) filed a Section 301 petition with the U.S. Trade Representative, accusing China of illegally stimulating and protecting producers of green technology exports, ranging from PAGE 7 wind and solar energy products to advanced batteries and energy-efficient vehicles. Indeed, the U.S. trade deficit in clean energy products had more than doubled between 2008 and 2010, displacing more than 8,000 U.S. jobs in 2010 alone (Scott 2010). The 2010 USW petition details more than 80 Chinese laws, regulations, and practices that violate international trade agreements and have hurt U.S. clean energy manufacturing and green technology industries. In July 2012, the Obama administration filed a WTO complaint against China over its tariffs on large vehicles exported from the United States to China. This was the seventh complaint filed by the administration against China, and the previous six have all been successful (Scott 2012). Another crucial missing link: Foreign direct investment and outsourcing Proponents of trade deals such as the agreement to endorse China’s admission to the World Trade Organization usually focus on the impacts of these deals on tariff and non-tariff barriers to trade.7 China agreed to make major tariff reductions as a condition of entry into the WTO. President Clinton and many others argued that since U.S. tariff barriers were already low, the agreement would have a much larger effect on U.S. exports to China than on U.S. imports. But proponents failed to consider the effect of China’s entry on foreign direct investment (FDI) and outsourcing. FDI has played a key role in the growth of China’s manufacturing sector. China is the largest recipient of FDI of all developing countries (Xing 2010) and is the third-largest recipient of FDI over the past three decades, trailing only the United States and the United Kingdom. Foreign-invested enterprises (both joint ventures and wholly owned subsidiaries) were responsible for 52.4 percent of China’s exports and 84.1 percent of its trade surplus in 2011 (Ministry of Commerce, China E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 2012). Outsourcing—through foreign direct investment in factories that make goods for export to the United States—has played a key role in the shift of manufacturing production and jobs from the United States to China since it entered the WTO in 2001. Foreign invested enterprises were responsible for the vast majority of China’s global trade surplus in 2011. Failed expectations of a growing Chinese market for U.S. goods 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. However, despite widespread reports of the rapid growth of the Chinese middle class, this growth has not resulted in a significant increase in U.S. consumer exports to China. The most rapidly growing exports to China are bulk commodities such as grains, scrap, and chemicals; intermediate products such as semiconductors; and producer durables such as aircraft and non-electrical machinery (see the discussion of Table 2 later in this paper, and Supplemental Table C to this report at http://www.epi.org/publication/bp345-china-growingtrade-deficit-cost/). Furthermore, the increase in U.S. exports to China since 2001 has been overwhelmed by the growth of U.S. imports, as discussed next. Trade-distorting policies and unplanned-for investment shifts have combined to radically increase China’s share of the U.S. trade deficit The bottom line of the influences discussed above is this: As a result of China’s currency manipulation and other trade-distorting practices (including extensive subsidies, legal and illegal barriers to imports, dumping, and suppression of wages and labor rights), the increase in foreign direct investment in China and related growth of its man- PAGE 8 ufacturing sector, and the absence of a growing market for U.S. consumer goods in China, the U.S. trade deficit with China rose from $84.1 billion in 2001 to $301.6 billion in 2011, an increase of $217.5 billion, as shown in Table 1. Since China entered the WTO in 2001, this deficit has increased annually by $21.7 billion, or 13.6 percent, on average. Despite the collapse in world trade between 2008 and 2009 caused by the Great Recession, the U.S. trade deficit with China increased $31.2 billion between 2008 and 2011. China’s share of the overall U.S. trade deficit increased from 32.6 percent to 40.8 percent, and its share of the total U.S. non-oil trade deficit jumped from 69.6 percent in 2008 to 77.7 percent in 2011 (according to the author’s analysis of U.S. International Trade Commission 2012). Unless China raises the real value of the yuan by at least a third and eliminates these other trade distortions, the U.S. trade deficit and related job losses will continue to grow rapidly. (Although China did respond to international pressure in the late 2000s and allowed some appre- ciation in the yuan, it was too little and too late to help arrest the widening U.S.-China trade gap.8) Growing trade deficits and job losses Each $1 billion in exports to China from the United States supports some American jobs. However, each $1 billion in imports from China displaces the American workers who would have been employed making these products in the United States. The net employment effect of trade depends on the changes in the trade balance. An improving trade balance can support job creation, but growing trade deficits usually result in growing net U.S. job displacement. The United States has had large trade deficits with China since 2001, which increased in every year except 2009, when U.S. trade with all countries collapsed due to the recession of 2007–2009. The employment impacts of the growing U.S. trade deficit with China are estimated in this paper using an inputoutput model that estimates the direct and indirect labor requirements of producing output in a given domestic industry. The model includes 195 U.S. industries, 77 Trade and employment models 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. This report uses standard input-output models and data to estimate the jobs displaced by trade. Many reports by economists in the public and private sectors have used an “all-but-identical” methodology to estimate jobs gained or displaced by trade, including Groshen, Hobijn, and McConnell (2005) of the Federal Reserve Bank of New York, and Bailey and Lawrence (2004) in the Brookings Papers on Economic Activity. The U.S. Department of Commerce recently published estimates of the jobs supported by U.S. exports (Tschetter 2010). That study used input-output and “employment requirements” tables from the Bureau of Labor Statistics Office of Employment Projections (2011a), the same source used to develop job displacement estimates in this report. The Tschetter report represents the work of a panel of experts from 20 federal agencies, including Mark Doms, chief economist at the U.S. Department of Commerce, and David Walters, chief economist at the Office of the U.S. Trade Representative. E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 PAGE 9 of which are in the manufacturing sector (see the box placed increased by 21.7 percent. Meanwhile, the U.S. titled “Trade and employment models,” as well as the Appendix, for details on model structure and data sources). The Bureau of Labor Statistics Office of Employment Projections (BLS–OEP) revised and updated its labor requirements model and related data in December 2011 (a; b). Our models have been completely revised and updated using the newest, best available data for this report. trade deficit with the rest of the world declined 19.3 percent between 2008 and 2011 (according to the author’s analysis of U.S. International Trade Commission 2012). These figures illustrate the damage done when China took advantage of the Great Recession to expand its beggar-thy-neighbor trade policies through currency manipulation and other illegal and unfair trade policies, which undermined job creation in the U.S. economy throughout the downturn. The model estimates the amount of labor (number of jobs) required to produce a given volume of exports and the labor displaced when a given volume of imports is substituted for domestic output.9 The difference between these two numbers is essentially the jobs displaced by growing trade deficits, holding all else equal. Jobs displaced by the growing China trade deficit are a net drain on employment in trade-related industries, especially those in manufacturing. Even if increases in demand in other sectors absorb all the workers displaced by trade (which is unlikely), job quality will likely suffer because many non-traded industries such as retail and home health care pay lower wages and have less comprehensive benefits than traded-goods industries. U.S. exports to China in 2001 supported 169,400 jobs, but U.S. imports displaced production that would have supported 1,139,500 jobs, as shown in the bottom half of Table 1. Therefore, the $84.1 billion trade deficit in 2001 displaced 970,100 jobs in that year. Job displacement rose to 3,050,200 jobs in 2008 and 3,712,300 jobs in 2011. Since China’s entry into the WTO in 2001 and through 2011, the increase in U.S.-China trade deficits eliminated or displaced 2,742,200 U.S. jobs, as shown in the bottom half of Table 1. Rising trade deficits have displaced a growing number of jobs every year since China joined the WTO, with the exception of 2009 (during the Great Recession), as shown in Figure A. The U.S. trade deficit with China increased by $31.2 billion (or 11.6 percent) between 2008 and 2011, and the number of jobs disE PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 Between 2008 and 2011 alone 662,100 jobs were lost, either by the elimination of existing jobs or by the prevention of new job creation (Figure A). On average, 274,200 jobs per year have been lost or displaced since China’s entry into the WTO (Table 1). The continuing growth of job displacement between 2008 and 2011 despite the relatively small increase in the trade deficit reflects the relatively rapid growth of U.S. imports of computer and electronics products from China, and the fact that the price index for most of these products fell continuously throughout the study period, as noted later in this paper. The share of U.S. imports from China accounted for by computer and electronic products (in current, nominal dollars) increased from 32.9 percent in 2008 to 37.4 percent in 2011 (according to the author’s analysis of USITC 2012). Trade and jobs, by industry The composition of imports from China is changing in fundamental ways, with serious implications for certain kinds of high-skill, high-wage jobs once thought to be the hallmark of the U.S. economy. China is moving rapidly “upscale,” from low-tech, low-skilled, labor-intensive industries such as apparel, footwear, and basic electronics to more capital- and skills-intensive sectors such as computers, electrical machinery, and motor vehicle parts. It has also developed a rapidly growing trade surplus in high-technology products. PAGE 10 FIGURE A Cumulative U.S. jobs displaced by growing trade deficits with China since 2001 Source: Author’s analysis of U.S. Census Bureau (2009), U.S. International Trade Commission (2012), and Bureau of Labor Statistics Office of Employment Projections (2011a and 2011b). For a more detailed explanation of data sources and computations, see the Appendix. From 2001 to 2011, imports from China increased dramatically, rising from $102.1 billion in 2001 to $398.5 billion in 2011, as shown in Table 1.10 Table 2 provides a snapshot of the changes in goods trade flows between 2001 and 2011, by sector, for exports, imports, and the trade balance. The rapid growth of the bilateral trade deficit in computer and electronic products (including computers, parts, semiconductors, and audio-video equipment) accounted for more than 54.9 percent of the $217.5 billion increase in the U.S. trade deficit with China between 2001 and 2011. In 2011, the total U.S. trade deficit with China was $301.6 billion—$139.3 billion of which was in computer and electronic products (trade flows by industry in 2001 and 2011 are shown in Supplemental Table C, available at http://www.epi.org/ publication/bp345-china-growing-trade-deficit-cost/). E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 Table 2 shows that the growth in manufactured imports explained 99.2 percent of total growth in imports from China between 2001 and 2011, and included a wide array of products. Computer and electronic products were responsible for 42.1 percent of the growth in imports in this period, including computer equipment ($60.2 billion, or 20.3 percent of the overall growth in imports) and communications, audio, and video equipment ($46.4 billion, 15.6 percent). Other major importing sectors included apparel ($23.8 billion, 8.0 percent) and miscellaneous manufactured commodities ($22.7 billion, 7.7 percent). U.S. exports to China rose rapidly from 2001 to 2011, but from a much smaller base, from $18.0 billion in 2001 to $96.9 billion in 2011 (as depicted in Table 1). As Table 2 shows, manufacturing was the top industry exportPAGE 11 TA B L E 2 Change in U.S. trade with China, by industry, 2001–2011 IMPORTS Industry* Change ($billions) EXPORTS Share of total change Change ($billions) TRADE BALANCE Share of total change Change ($billions) Share of total change Agriculture, forestry, fisheries 2.2 0.7% 15.8 20.0% 13.7 -6.3% Mining 0.0 0.0% 2.5 3.1% 2.5 -1.1% -0.1 0.0% 0.1 0.1% 0.1 -0.1% 0.0 0.0% 2.4 3.1% 2.4 -1.1% 294.1 99.2% 50.2 63.5% -243.9 112.2% 46.6 15.7% 3.7 4.7% -42.9 19.7% Food and kindred products 2.8 0.9% 2.6 3.3% -0.2 0.1% Beverage and tobacco products 0.0 0.0% 0.4 0.5% 0.4 -0.2% Textile mills and textile product mills 8.3 2.8% 0.4 0.5% -7.9 3.6% Apparel and accessories 23.8 8.0% 0.0 0.0% -23.8 11.0% Leather and allied products 11.6 3.9% 0.2 0.3% -11.4 5.2% Industrial supplies 29.1 9.8% 16.4 20.8% -12.8 5.9% Wood products 1.9 0.6% 0.7 0.9% -1.2 0.5% Paper 2.2 0.8% 2.1 2.6% -0.2 0.1% Printed matter and related products 1.5 0.5% 0.1 0.2% -1.4 0.7% Petroleum and coal products 0.0 0.0% 1.0 1.2% 1.0 -0.4% 10.8 3.6% 11.1 14.0% 0.3 -0.1% Plastics and rubber products 9.2 3.1% 1.0 1.3% -8.2 3.8% Nonmetallic mineral products 3.5 1.2% 0.4 0.5% -3.1 1.4% Durable goods 218.3 73.7% 30.1 38.1% -188.3 86.6% Primary metal 3.4 1.2% 2.3 2.9% -1.1 0.5% Fabricated metal products 12.7 4.3% 1.4 1.8% -11.2 5.2% Machinery, except electrical 16.8 5.7% 7.9 10.0% -9.0 4.1% Computer and electronic products 124.9 42.1% 5.4 6.8% -119.5 54.9% Computer and peripheral equipment 60.2 20.3% -0.2 -0.2% -60.4 27.8% Communications, audio, and video equipment 46.4 15.6% -0.2 -0.3% -46.6 21.4% Oil and gas Minerals and ores Manufacturing Nondurable goods Chemicals E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 PAGE 12 TA B L E 2 ( C O N T I N U E D ) IMPORTS Industry* Change ($billions) Navigational, measuring, electromedical, and control instruments EXPORTS Share of total change Change ($billions) TRADE BALANCE Share of total change Change ($billions) Share of total change 3.9 1.3% 3.1 3.9% -0.8 0.4% 14.3 4.8% 2.7 3.4% -11.6 5.4% Electrical equipment, appliances, and components 18.8 6.3% 1.3 1.6% -17.5 8.1% Transportation equipment 9.0 3.0% 9.9 12.5% 0.9 -0.4% Motor vehicles and parts 7.7 2.6% 6.0 7.6% -1.7 0.8% Aerospace products and parts 0.5 0.2% 3.8 4.8% 3.2 -1.5% Railroad, ship, and other transportation equipment 0.7 0.2% 0.1 0.2% -0.6 0.3% Furniture and fixtures 10.1 3.4% 0.1 0.1% -10.0 4.6% Miscellaneous manufactured commodities 22.7 7.7% 1.8 2.3% -20.9 9.6% Information** 0.0 0.0% 0.1 0.1% 0.1 0.0% Scrap and second-hand goods 0.2 0.1% 10.4 13.2% 10.2 -4.7% Subtotal change, non-oil goods 296.5 100.0% 77.9 98.7% -218.6 100.5% Total change 296.4 100.0% 78.9 100.0% -217.5 100.0% Semiconductor and other electronic components, and magnetic and storage media * Excludes utilities, construction, and service sectors, which do not have trade in these data. ** Includes publishing industries (excluding Internet); goods trade in this sector is concentrated in NAICS 5111, Newspaper, periodical, book, and directory publishers. Source: Author’s analysis of U.S. International Trade Commission (2012). For a more detailed explanation of the data sources and computations, see the Appendix. ing to China—63.5 percent of the growth in exports to China between 2001 and 2011 was in manufactured goods, totaling $50.2 billion. Within manufacturing, key export-growth sectors included chemicals ($11.1 billion, or 14.0 percent of the growth in exports), aerospace products and parts ($3.8 billion, 4.8 percent), machinery ($7.9 billion, 10.0 percent), and motor vehicles and parts ($6.0 billion, 7.6 percent). Scrap and second-hand goods industries (which support no jobs, according to BLS–OEP 2011a models11) accounted for 13.2 percent E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 ($10.4 billion) of the growth in exports. Agricultural exports, which were dominated by corn, soybeans, and other cash grains, grew faster than any individual manufacturing sector, increasing $15.8 billion (20.0 percent of the total increase) between 2001 and 2011. Nonetheless, the overall scale of U.S. exports to China in 2011 was dwarfed by imports from China in that year, which exceeded the value of exports by more than 4 to 1. The data reflect China’s rapid expansion into highervalue-added commodities once considered strengths of PAGE 13 the United States, such as computer and electronic products, which accounted for 37.4 percent ($149.2 billion) of U.S. imports from China in 2011. This growth is apparent in the shifting trade balance in advanced technology products (ATP), a broad category of high-end technology goods trade tracked by the U.S. Census Bureau.12 ATP includes the more advanced elements of the computer and electronic products industry as well as other sectors such as biotechnology, life sciences, aerospace, nuclear technology, and flexible manufacturing. The ATP sector includes some auto parts; China is now one of the top suppliers of auto parts to the United States, having recently surpassed Germany (Scott and Wething 2012). In 2011, the United States had a $109.4 billion trade deficit with China in ATP, reflecting a nine-fold increase from $11.8 billion in 2002. This ATP deficit was responsible for 36.3 percent of the total U.S.-China trade deficit in 2011. It dwarfs the $9.7 billion surplus in ATP that the United States had with the rest of the world in 2011, the result of a 5.1 percent annual increase in U.S. ATP exports to the rest of the world between 2002 and 2011. As a result of the U.S. ATP deficit with China, the United States ran an overall deficit in ATP products in 2011 (of $99.6 billion), as it has in every year since 2002 (U.S. Census Bureau 2012c). Trade deficits are highly correlated with job loss or displacement by industry, as shown in Table 3. Growing trade deficits with China eliminated 2,109,700 manufacturing jobs between 2001 and 2011, more than threequarters (76.9 percent) of the total. By far the largest job displacements occurred in the computer and electronic products sector, which lost 1,064,800 jobs (38.8 percent of the more than 2.7 million jobs displaced overall). This sector includes computer and peripheral equipment (620,700 jobs, 22.6 percent of the overall jobs displaced), semiconductors and components (235,000 jobs, 8.6 percent), and communications, audio, and video equipment (203,500 jobs, 7.4 percent). Other hard-hit sectors E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 included apparel and accessories (211,200 jobs displaced, equal to 7.7 percent of the total), textile mills and textile product mills (106,200, 3.9 percent), fabricated metal products (120,600, 4.4 percent), furniture and fixtures (80,700, 2.9 percent), plastics and rubber products (57,600, 2.1 percent), motor vehicles and parts (19,800, 0.7 percent), and miscellaneous manufacturing (111,800 jobs, 4.1 percent). Several service industries, which provide key inputs to traded-goods production, experienced significant job displacement, including administrative, support, and waste management services (160,600 jobs, 5.9 percent) and professional, scientific, and technical services (145,000 jobs, 5.3 percent). These job displacement estimates are based on changes in the real value of exports and imports. For example, while the share of U.S. imports accounted for by computer and electronic products from China rose from 23.8 percent in 2001 to 37.4 percent in 2011 (to $149.2 billion), the average price indexes (deflators) for most of these products fell sharply between 2001 and 2011—28.9 percent on a trade-weighted basis. Thus, the real value of computer and electronic imports increased more than 10-fold in this period, rising from $19.5 billion to $198.5 billion in 2011 in constant 2005 dollars.13 Job losses by state Growing trade deficits with China have reduced demand for goods produced in every region of the United States and led to job displacement in all 50 states, Puerto Rico, and the District of Columbia, as shown in Table 4 and Figure B. (Appendix Table 1 ranks the states by the number of net jobs displaced, while Appendix Table 2 presents the same data but sorts the states alphabetically.) Table 4 shows that jobs displaced from 2001 to 2011 due to growing deficits with China equaled or exceeded 2.2 percent of total state employment in states such as New Hampshire, California, Massachusetts, Oregon, North Carolina, Minnesota, Idaho, Vermont, Colorado, Texas, Rhode Island, and Alabama. As shown in Appendix Tables 1 and 2, nearly 475,000 jobs were lost in CaliPAGE 14 TA B L E 3 Net jobs created (+) or displaced (-) by U.S. trade with China, by industry, 2001–2011 Industry Industry total* Industry share of total jobs displaced Agriculture, forestry, fisheries 53,200 -1.9% Mining -1,000 0.0% Oil and gas -900 0.0% Minerals and ores -100 0.0% Utilities -10,600 0.4% Construction -15,400 0.6% -2,109,700 76.9% -396,300 14.5% -7,200 0.3% 800 0.0% Textile mills and textile product mills -106,200 3.9% Apparel and accessories -211,200 7.7% -72,500 2.6% Industrial supplies -153,300 5.6% Wood products -17,200 0.6% Paper -17,700 0.6% Printed matter and related products -16,400 0.6% -500 0.0% Chemicals -19,000 0.7% Plastics and rubber products -57,600 2.1% Nonmetallic mineral products -24,900 0.9% Durable goods -1,560,100 56.9% Primary metal -35,900 1.3% Fabricated metal products -120,600 4.4% Machinery, except electrical -54,300 2.0% -1,064,800 38.8% Computer and peripheral equipment -620,700 22.6% Communications, audio, and video equipment -203,500 7.4% -5,500 0.2% -235,000 8.6% Manufacturing Nondurable goods Food and kindred products Beverage and tobacco products Leather and allied products Petroleum and coal products Computer and electronic products Navigational, measuring, electromedical, and control instruments Semiconductor and other electronic components, and magnetic and optical media production E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 PAGE 15 TA B L E 3 ( C O N T I N U E D ) Industry total* Industry Industry share of total jobs displaced Electrical equipment, appliances, and components -78,100 2.8% Transportation equipment -13,800 0.5% Motor vehicles and parts -19,800 0.7% 8,000 -0.3% -2,000 0.1% -80,700 2.9% -111,800 4.1% 0 0.0% Transportation -76,500 2.8% Information -48,700 1.8% Finance and insurance -28,000 1.0% Real estate and rental and leasing -27,400 1.0% -145,000 5.3% -90,000 3.3% -160,600 5.9% -400 0.0% 1,800 -0.1% Arts, entertainment, and recreation -8,500 0.3% Accommodation and food services -41,500 1.5% Other services -29,900 1.1% -4,100 0.1% 0 0.0% -2,740,800 99.9% -2,742,200 100.0% Aerospace products and parts Railroad, ship, and other transportation equipment Furniture and fixtures Miscellaneous manufactured commodities Wholesale and retail trade Professional, scientific, and technical services Management of companies and enterprises Administrative and support and waste management and remediation services Education services Health care and social assistance Government Scrap and second-hand goods Subtotal, non-oil goods Total jobs created or displaced* * Subcategory and category totals may not sum exactly due to rounding. Source: Author’s analysis of U.S. Census Bureau (2009), U.S. International Trade Commission (2012), and Bureau of Labor Statistics Office of Employment Projections (2011a and 2011b). For a more detailed explanation of data sources and computations, see the Appendix. fornia, compared with nearly 240,000 in Texas, almost 159,000 in New York, and nearly 114,000 in Illinois. The more than 2.7 million U.S. jobs displaced due to growing E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 trade deficits with China represented about 1.9 percent of total U.S. employment (Table 4). PAGE 16 TA B L E 4 Jobs displaced due to U.S. trade with China, by state, 2001–2011 (ranked by jobs displaced as share of state employment) Net jobs displaced Total state employment* 20,400 694,200 2.94% 474,700 16,565,000 2.87% Massachusetts 92,700 3,241,300 2.86% Oregon 50,200 1,764,400 2.85% 110,300 4,133,000 2.67% Minnesota 72,300 2,713,700 2.66% Idaho 18,200 685,800 2.65% Vermont 8,000 329,700 2.43% Colorado 57,800 2,424,500 2.38% 239,600 10,602,400 2.26% Rhode Island 11,800 526,500 2.24% Alabama 43,900 1,996,000 2.20% South Carolina 40,800 1,950,800 2.09% Georgia 87,300 4,310,000 2.03% Tennessee 56,100 2,778,500 2.02% Wisconsin 54,600 2,849,100 1.92% Kentucky 35,700 1,863,500 1.92% Indiana 56,600 3,000,700 1.89% Illinois 113,700 6,087,800 1.87% Puerto Rico 22,200 1,199,900 1.85% New Jersey 76,000 4,212,200 1.80% 158,800 8,954,600 1.77% 95,900 5,412,100 1.77% Pennsylvania 101,200 5,825,400 1.74% Connecticut 29,900 1,742,300 1.72% Arizona 47,100 2,756,400 1.71% Arkansas 20,500 1,237,400 1.66% Washington 50,200 3,051,500 1.65% Mississippi 19,700 1,201,700 1.64% State New Hampshire California North Carolina Texas New York Ohio E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 Jobs displaced as share of state employment PAGE 17 TA B L E 4 ( C O N T I N U E D ) State Net jobs displaced Total state employment* Utah 20,000 1,228,900 1.63% Michigan 68,900 4,503,100 1.53% Maine 10,000 656,400 1.52% Virginia 52,700 3,739,700 1.41% Missouri 38,700 2,774,000 1.40% Maryland 37,800 2,827,400 1.34% Iowa 20,300 1,530,400 1.33% New Mexico 11,500 868,100 1.32% 5,300 407,600 1.30% Florida 106,100 8,204,700 1.29% Kansas 17,500 1,370,300 1.28% Oklahoma 20,400 1,626,900 1.25% Delaware 5,000 407,900 1.23% Nebraska 10,600 908,100 1.17% Nevada 13,200 1,206,800 1.09% West Virginia 7,200 753,200 0.96% District of Columbia 2,600 286,400 0.91% 15,300 1,872,100 0.82% North Dakota 2,700 336,900 0.80% Hawaii 4,300 605,800 0.71% Montana 2,800 464,900 0.60% Alaska 1,800 322,300 0.56% Wyoming 1,500 268,800 0.56% 2,742,200 141,348,700 1.94% South Dakota Louisiana Total** Jobs displaced as share of state employment * Average state employment in 2005–2007. Analysis based on pooled, three-year time series data from the U.S. Census American Community Survey, as described in the Appendix. ** Total may vary slightly due to rounding. Source: Author’s analysis of U.S. Census Bureau (2009), U.S. International Trade Commission (2012), and Bureau of Labor Statistics Office of Employment Projections (2011a and 2011b). For a more detailed explanation of data sources and computations, see the Appendix. Figure B shows the broad impact of growing trade deficits with China across the United States, with no areas exempt. Job losses have been most concentrated in states E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 with high-tech industries, such as California, Massachusetts, Oregon, Minnesota, Idaho, Colorado, and Texas, and in manufacturing states, including New Hampshire, PAGE 18 FIGURE B Jobs displaced due to U.S. trade with China as a share of state employment, 2001–2011 Source: Author’s analysis of U.S. Census Bureau (2009), U.S. International Trade Commission (2012), and Bureau of Labor Statistics Office of Employment Projections (2011a and 2011b). For a more detailed explanation of data sources and computations, see the Appendix. North Carolina, and Vermont. Other hard-hit states include traditional manufacturing powers such as Rhode Island, Alabama, South Carolina, Georgia, Tennessee, Wisconsin, Kentucky, Indiana, Illinois, New Jersey, New York, Ohio, and Pennsylvania. Job losses by congressional district This study also reports the employment impacts of growing trade deficits in every congressional district, including the District of Columbia and Puerto Rico. (Data for all 435 districts plus the District of Columbia and Puerto Rico are shown in Supplemental Tables A and B posted E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 online along with this report at http://www.epi.org/publication/bp345-china-growing-trade-deficit-cost/.) Because the computer and electronic products industry experienced the largest growth in trade deficits with China, many of the hardest-hit congressional districts were located in California, Texas, Oregon, Massachusetts, Colorado, and Minnesota, where remaining jobs in that industry are concentrated. Other states with hard-hit districts include North Carolina, Georgia, and Alabama, which suffered considerable job displacement in a variety of manufacturing industries.14 The top 20 hardest-hit congressional districts are shown in Table 5. Seven were in California, four were in Texas, PAGE 19 TA B L E 5 Top 20 congressional districts hardest-hit by U.S. trade deficits with China (ranked by jobs displaced as share of district employment), 2001–2011 Jobs displaced District employment* Jobs displaced as share of district employment Rank District 1 California 15 44,700 324,600 13.77% 2 California 14 32,700 320,700 10.20% 3 California 16 29,000 303,700 9.55% 4 Texas 31 24,300 338,200 7.19% 5 California 13 20,200 313,900 6.44% 6 Texas 10 26,300 436,900 6.02% 7 Oregon 1 21,100 388,100 5.44% 8 Massachusetts 5 17,200 317,400 5.42% 9 California 31 14,600 291,600 5.01% 10 Massachusetts 3 15,500 322,800 4.80% 11 North Carolina 4 17,700 384,800 4.60% 12 California 34 12,000 262,800 4.57% 13 Texas 25 15,600 377,800 4.13% 14 Georgia 9 14,300 352,100 4.06% 15 California 50 13,600 344,500 3.95% 16 Colorado 4 13,800 352,500 3.91% 17 Minnesota 1 12,900 334,100 3.86% 18 North Carolina 10 11,600 301,100 3.85% 19 Alabama 5 11,400 302,400 3.77% 20 Texas 3 15,600 418,300 3.73% * Average congressional district employment in 2005–2007. Analysis based on pooled, three-year time series data from U.S. Census American Community Survey, as described in the Appendix. Source: Author’s analysis of U.S. Census Bureau (2009), U.S. International Trade Commission (2012), and Bureau of Labor Statistics Office of Employment Projections (2011a and 2011b). For a more detailed explanation of data sources and computations, see the Appendix. two were in North Carolina, two were in Massachusetts, and one each was in Oregon, Georgia, Colorado, Minnesota, and Alabama. Each of these districts lost at least 11,400 jobs between 2001 and 2011, or more than 3.7 percent of its total jobs. These distributions reflect both E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 the size of some states (e.g., California and Texas) and also the concentration of the industries hardest-hit by growing China trade deficits, such as computer and electronic products and other industries including furniture, textiles, apparel, and durable goods manufacturing. PAGE 20 The three hardest-hit congressional districts were all located in Silicon Valley in California, including the 15th (Santa Clara County), the 14th (Palo Alto and nearby cities), and the 16th (San Jose and other parts of Santa Clara County). Summing up trade’s overall employment and wage impact Growing trade deficits with China have clearly reduced domestic employment in traded-goods industries, especially in the manufacturing sector, which has been pummeled by plant closings and job losses. Workers from the manufacturing sector displaced by trade have had particular difficulty securing comparable employment elsewhere in the economy. Many have not been reemployed, and more than half of those reemployed have experienced a decline in wages. One-third experienced a wage decline of more than 20 percent, according to the most recent Bureau of Labor Statistics survey covering workers displaced from January 2007 to December 2009 (BLS 2010). Nearly two-thirds (61.3 percent) of displaced workers in manufacturing remained unemployed, including 16.7 percent who were not in the labor force. The average wage decline for those who were reemployed was 17.5 percent (Farber 2011, 21). The lost output of unemployed workers, especially that of labor force dropouts, can never be regained and is one of the largest costs of displacement to the economy as a whole. Some economists and others have argued that job loss numbers extrapolated from trade flows are uninformative because aggregate employment levels in the United States are set by a broad range of macroeconomic influences, not just by trade flows.15 However, while the trade balance is but one of many variables affecting aggregate job creation, it plays a much larger role in explaining structural change in employment, especially in the manufacturing sector. Between December 2001 and December 2011, 3.9 million U.S. manufacturing jobs were lost (Bureau of Labor Statistics 2012a). The growth of U.S. trade deficits with E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 China was responsible for the displacement of more than 2.1 million manufacturing jobs in this period, or about 54 percent of manufacturing jobs lost.16 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 losses 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. Many of the mechanisms that could offset employment losses caused by growing trade deficits are not operating in the current downturn. The Federal Reserve cannot cut interest rates any further than it already has, and interestrate-sensitive industries such as residential construction are not experiencing employment gains from lower rates. In short, in today’s economy with its high unemployment rate, jobs displaced due to trade deficits with China are much more likely to be actual net, economy-wide losses than simply job reallocations. Conclusion The growing U.S. trade deficit with China has displaced millions of jobs in the United States and contributed heavily to the crisis in U.S. manufacturing employment, which has heightened over the last decade largely due to trade with China. Moreover, the United States is piling up foreign debt, losing export capacity, and facing a more fragile macroeconomic environment. Is America’s loss China’s gain? The answer is not clearly affirmative. China has become dependent on the U.S. consumer market for employment generation, suppressed the purchasing power of its own middle class with a weak currency, and, most important, now holds over $3 trillion in hard currency reserves instead of investing them in public goods that could benefit Chinese households. PAGE 21 Although economic growth in China has been rapid, it is unbalanced and unsustainable. Its vast purchases of foreign exchange reserves have led to the overheating of its domestic economy, and inflation in China has accelerated rapidly in the recent past. Its repression of labor rights has suppressed wages, thereby artificially subsidizing exports. China’s economy is teetering on the edge between inflation and a growth slump, and a soft landing is nowhere in sight. China needs to rebalance its economy by becoming less dependent on exports and more dependent on domestic demand led by higher wages and infrastructure spending. The U.S.-China trade relationship needs a fundamental change. Addressing the exchange rate policies and labor standards issues in the Chinese economy is an important first step. It is time for the administration to respond to the growing chorus of calls from economists, workers, businesses, and Congress and take action to stop illegal currency manipulation by China and other countries. —The author thanks Ross Eisenbrey for comments, Hilary Wething for research assistance, Michael McCarthy and Patrick Watson for editing, and Dan Essrow for graphic design assistance. —This research was made possible by support from the Alliance for American Manufacturing. Appendix Methodology The trade and employment analyses in this report are based on a detailed, industry-based study of the relationships between changes in trade flows and employment for each of approximately 195 individual industries of the U.S. economy, specially grouped into 53 custom sectors17 and using the North American Industry Classification System (NAICS) with data obtained from the U.S. Census Bureau (2009) and the U.S. International Trade Commission (USITC 2012). E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 This study separates exports produced domestically from foreign exports—which are goods produced in other countries, exported to the United States, and then reexported from the United States. Because only domestically produced exports generate jobs in the United States, employment calculations here are based only on domestic exports. The measure of the net impact of trade used here to calculate the employment content of trade is the difference between domestic exports and consumption imports. The number of jobs supported by $1 million of exports or imports for each of 195 different U.S. industries is estimated using a labor requirements model derived from an input-output table developed by the BLS–OEP (2011a).18 This model includes both the direct effects of changes in output (for example, the number of jobs supported by $1 million in auto assembly) and the indirect effects on industries that supply goods used in the manufacture of cars. The indirect impacts include jobs in auto parts, steel, and rubber, as well as service industries such as accounting, finance, and computer programming. This model estimates the labor content of trade using empirical estimates of labor content and trade flows between U.S. industries in a given base year (an input-output table for the year 2001 was used in this study) that were developed by the U.S. Department of Commerce and the BLS–OEP. It is not a statistical survey of actual jobs gained or lost in individual companies, or the opening or closing of particular production facilities (Bronfenbrenner and Luce 2004 is one of the few studies based on news reports of individual plant closings). Nominal trade data used in this analysis were converted to constant 2005 dollars using industry-specific deflators (see next section for further details). This was necessary because the labor requirements table was estimated using price levels in that year. Data on real trade flows were converted to constant 2005 dollars using industry-specific price deflators from the BLS–OEP (2011b). These price deflators were updated using Bureau of Labor Statistics PAGE 22 producer price indexes (industry and commodity data; Bureau of Labor Statistics 2012b). Use of constant 2005 dollars was required for consistency with the other BLS models used in this study. Estimation and data sources Data requirements Step 1. U.S.-China trade data were obtained from the U.S. International Trade Commission DataWeb (U.S. International Trade Commission 2012) in four-digit, three-digit, and two-digit NAICS format. Consumption imports and domestic exports are downloaded for each year. Step 2. To conform to the BLS Employment Requirements tables (BLS–OEP 2011a), trade data must be converted into the BLS industry classifications system. For NAICS-based data, there are 195 BLS industries. The data are then mapped from NAICS industries onto their respective BLS sectors. The trade data, which are in current dollars, are deflated into real 2005 dollars using published price deflators from the BLS–OEP (2011b) and the Bureau of Labor Statistics (2012b). Step 3. Real domestic employment requirements tables are downloaded from the BLS (2011a). These matrices are input-output industry-by-industry tables that show the employment requirements for $1 million in outputs in 2005 dollars. So, for industry i the aij entry is the employment indirectly supported in industry i by final sales in industry j and where i=j, the employment directly supported. Analysis Step 1. Job equivalents BLS trade data are compiled into matrices. Let [T2001] be the 195×2 matrix made up of a column of imports and a column of exports for 2001. [T2011] is defined as the 195×2 matrix of 2011 trade data. Finally, [T2008] is E PI BRIEFING PAPER # 345 | AU GU S T 23, 2012 defined as the 195×2 matrix of 2008 trade data. Define [E2001] as the 195×195 matrix consisting o...
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Running head: TRADE DEBATE

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Trade Debate
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TRADE DEBATE

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Globalization is the process of interaction and integration among the people, companies,
and governments of different nations arising from the interchange of world views whereas
protectionism is the direct opposite free trade. It involves economic policies of restraining trade
between states through measures such as restrictive quotas, issuing of tariffs on imported goods,
subsidies or taxes. Protectionism is a better strategy to assure economic security since it has a
wide range of benefits that are reflected directly in the country’s economy. The positive impacts
on the economy include shielding local workers and local industries hence leading to long-term
economic growth and also protecting the currency (Scheve & Slaughter, 2007).
Protectionism is no doubt the best shield for local workers in local industries from
competition from other countries which might result in low wages and loss of a lot of
employment opportunities. Treaties signed by countries to allow free mobility of labor in regions
have had harsh implications on loca...


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