The EPI Gets The Trade Deficit With China Entirely Wrong – Again

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The Economic Policy Institute wants to tell us all that the trade deficit with China is a very bad thing, very bad indeed. Because it has meant that the US economy is smaller than it would have been without the deficit, that it has killed manufacturing employment in the US and, well, you know, it’s a very bad thing. Sadly, near everything the EPI says about manufacturing, employment, China and the trade deficit is wrong. Including, quite possibly, the use of the word and.

Here is today’s must read: the definitive piece on just how much Chinese abuses of the trading system are costing U.S. workers.

Economists Robert E. Scott and Zane Mokhiber, in the most exhaustive study yet of the costs of the lopsided U.S.-China trade, report in an Economic Policy Institute study that since China was admitted to the World Trade Organization in 2001, U.S. trade with China has been responsible for a $100 billion increase in the annual trade deficit—and the loss of 3.4 million U.S. jobs.

Three-quarters of the lost jobs were in manufacturing, a sector that pays well above the average wage.

That’s Robert Kuttner and we’re not going to be surprised at the idea that he doesn’t know his economics. Here’s the EPI itself:

The China toll deepens
Growth in the bilateral trade deficit between 2001 and 2017 cost 3.4 million U.S. jobs, with losses in every state and congressional district

Well, no, not really. Top start with, trade changes the number of jobs in an economy not one whit. That is entirely and wholly determined by the mix of fiscal and monetary policy extant in that economy. Trade changes which jobs are done, most certainly, but not the number of them. Actually, that’s the point of trade. Get the foreigners to do the jobs they’re less bad at, we do the things we’re less bad at and we trade the resultant production. That we’re buying tchochke from China and China is buying buildings in NYC from us in return changes none of that. We’re just listing our imports on the current account, our exports on the capital one that’s all. And yes, the balance of payments does balance.

This report underscores the ongoing trade and jobs crisis by updating EPI’s research series on the jobs impact of the U.S.–China trade deficit. The most recent of these reports (Scott 2012; Kimball and Scott 2014; Scott 2017a) look at the effect of the U.S. trade deficit with China since China entered the WTO in 2001. Our model examines the job impacts of trade by subtracting the job opportunities lost to imports from those gained through exports.

That’s to entirely misunderstand the economic accounting for trade. Firstly, that’s looking at changes in jobs, not the number – see above. Secondly, it’s entirely disregarding the effect of Chinese capital investment in the US. Because it’s ignoring the capital account entirely. It’s thus nonsense as even a conceptual model.

The growing trade deficit with China since China entered the WTO affects different regions in different ways. Some regions are devastated by layoffs and factory closings while others are surviving but not growing the way they could be if new factories were opening and existing plants were hiring more workers. This slowdown in manufacturing job generation is also contributing to stagnating wages of typical workers and widening inequality.

Again, all of this is nonsense. The number of jobs in the US isn’t affected in the slightest by trade. How many there are depends upon the budget deficit and interest rates – to be crude, more accurately fiscal and monetary policy.

There is also that claim that manufacturing jobs are higher paid ones. They’re not. Average service and average manufacturing wages are within tens of cents an hour each of $25 an hour. They’re just not very different. Software engineering is a service job by classification but I’ve heard it can be well paid. Doctors, lawyers, accountants, service providers all, are notoriously badly paid. Further, it’s not even true that China has been taking all the well paid manufacturing jobs.

Making single crystal nickel blades for jet engines is a well paid job. Making socks not so much. GE and Rolls Royce still make those blades – China the socks. It is in fact the low paid manufacturing jobs which have been leaving. Which is logical enough, China’s workforce has been low skill and low paid – the two go together – so they’ll compete better for the low skill and low pay manufacturing jobs.

That is, the EPI is wrong on everything here. Trade doesn’t change the number of US jobs, only their type. Manufacturing is not generally better paid than services. And it’s not even the high paid manufacturing jobs that have gone, it’s the low paid like sock making and electronics assembly.

Oh, and that graph at the top? That’s the real output of the US manufacturing sector. Note how that has shrunk, wilted, under the stress of that trade deficit with China? Yep, me too.

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Tim WorstallSoutherner Recent comment authors
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Tim, you appear to be in cahoots with Mark Perry to ignore China’s theft of trillions of dollars of intellectual property. Mark’s colleagues at AEI all regard this as a heeyuge problem, which makes him an outlier. A rethink may be in order?