If you’ve read books like Pop Internationalism you know that international trade should not reduce employment. Some are fooled by the GDP equation, which might seem to imply that net exports are a problem:
GDP = C + I + G + (X-M)
In fact, a trade deficit implies an equal sized surplus of investment over saving. So a trade deficit does not reduce GDP.
There is one point that most skeptics are willing to accept—trade is not a problem if imports are balanced by exports. This post is aimed at people who have one of two concerns:
1. Perhaps economic theory is wrong and trade deficits do somehow lead to lower employment.
2. Perhaps trade deficits don’t reduce the overall employment level, but they reduce employment in the tradable goods sector.
I don’t agree with these concerns, but I’d still like to take them seriously. Consider the following question under the assumption that economists like me are wrong, and trade imbalances really do cost jobs. The question is:
How many jobs has America lost over the past thirty years, in the worst case where jobs lost in the tradable sector are not offset by jobs gained in non-tradables?
In other words, what is the worst case for trade?
In 1985:Q4, the US trade deficit was 2.996% of GDP
In 2015:Q4, the US trade deficit was 2.865% of GDP
So the trade deficit has shrunk slightly over the past 30 years. This means the answer to the previous question is:
In net terms, zero jobs have been lost in the tradable goods sector, as a result of trade deficits, over the past 30 years. Whatever jobs losses have occurred has been due to other factors, such as technological progress.
Whatever has been reducing employment of tradable goods workers over the past 30 years, it hasn’t been trade.
In fairness, in the 3 decades before 1985:Q4, the trade deficit increased by 3% GDP. So if you believe that trade deficits cause unemployment, then you might argue that workers were negatively affected during that earlier period. I don’t believe that, I’m just saying that if you do believe that trade deficits cause unemployment, that’s the period you should be focusing on. And even if I am wrong, obviously a 3% of GDP rise in the trade deficit doesn’t explain why the manufacturing sector has gone from over 30% of workers in the mid-1950s to about 8% today.
So if trade deficits aren’t a problem, are there any other channels by which trade could be a problem? Yes. Trade might affect income equality, reducing the relative wage of workers in the tradable goods sector. That might reduce the labor force participation rate of workers in the tradable goods sector. But again, that would have nothing to do with the trade deficit. Indeed it should be equally true of Germany, a country with a huge trade surplus.
PS. I have a new post on China trade over at Econlog.