Heritage Foundation’s view on China trade and jobs is like old wine that’s aged badly

A recent blog post by the Heritage Foundation’s Derek Scissors claims that my estimates of the number of jobs lost due to growing trade deficits with China “are demonstrably wrong.” Scissors then fails to demonstrate how they’re wrong.

That’s because he can’t. The economic models used in our report (Scott 2012, 9, Appendix and note 15) are the gold standard for research on the employment effects of trade, and “all but identical models” have been used in similar studies by the Federal Reserve Bank of New York, by Martin Bailey and Robert Lawrence of the Brookings Institution, and in a U.S. Commerce Department study that represents the work of more than 20 government economists including the chief economists from that agency and the Office of the U.S. Trade Representative.

At its core, our model is based on a straightforward application of Keynesian economics and national income accounting, which show that exports stimulate the domestic economy while imports reduce demand for domestic products. Scissors (and many others before him, such as Dan Griswold at Cato and the U.S. China Business Council) claims that imports are good for the economy, in part because they are correlated with growth. But this assertion ignores two fundamental questions:  Do we really need to have the trade deficit grow as a precondition for output growth; and what is the counterfactual? Our model provides a clear answer to the second question: growing trade deficits with China cost 2.7 million U.S. jobs between 2001 and 2010. Using an entirely different statistical technique, David Autor, David Dorn and Gordon Hanson conclude that between 1990 and 2007, rising exposure to imports from China “increases unemployment, lowers labor force participation, and reduces wages in local labor markets. Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment,” or about 900,000 jobs. In addition, they found that “transfer benefits payments for unemployment, disability, retirement, and healthcare also rise sharply in exposed labor markets.”

But was the growth of trade deficits with China inevitable, given its rapid growth and development over the last two decades? Definitely not. For one, textbook macroeconomics actually predict that poorer countries (like China) should actually be expected to run trade deficits with richer nations, as capital should flow from the U.S. to China to chase higher returns there. Further, other rich countries manage to engage in global trade without running chronic trade deficits. Germany, for example, has enjoyed rapidly growing global trade surpluses for the past decade. GDP per capita has grown twice as fast in Germany as it has in the United States between 2000 and 2011, and it recovered much more quickly from the global financial crisis than this country. Thus, growth in an advanced industrial economy doesn’t have to be positively correlated with the growth of imports, or of trade deficits.

Lastly, Scissors purports to show that growing import of clothes and toys from China support more than 500,000 U.S. jobs in transportation, port services, wholesale and retail sales, store construction, marketing, real estate, and financial services. The Heritage blog post, and a related report, fail to recognize that if toys and apparel imported from China were produced in the United States instead, those ancillary jobs and services would still be required to transport and market the same types of products. For these reasons, our model explicitly excludes wholesale and retail trade and advertising services associated with imports and exports. The Scissors model effectively double-counts jobs in these industries that would have existed whether those goods were imported or domestically produced.

In the 1990s, many economists scoffed at the notion that free trade agreements and growing trade deficits would cost large numbers of jobs in the domestic economy (see: Krugman and Lawrence 1994, Rowthorn and Ramaswamy, 1999). These views have now been accepted by the mainstream of the profession. Scissors and his friends at Cato and in the China lobby represent a discredited, minority point of view. They live in a theoretical world where labor markets adjust instantaneously, there is no unemployment, displaced workers are ignored, and a job gained at Walmart is just as good as one lost at General Motors. It’s old wine, and it’s badly spoiled.