Trade Not to Blame for Labor Day Blues

The past few Labor Days have not been the happiest of holidays for many U.S. workers. Despite almost two years of economic growth since the last recession officially ended, the unemployment rate lingers above 6 percent and a net 2.6 million manufacturing jobs have disappeared since 2000. Who’s to blame?

Not surprisingly, Democrats in Washington blame the Bush administration, and the president counters that he inherited a troubled economy from the previous Democratic administration. And politicians and interest groups across the spectrum blame trade, and more specifically imports from low-wage countries such as China, for grabbing domestic market share and pushing Americans out of their jobs. I’ll leave it to the politicians to point fingers at each other. But the charge that imports have caused high unemployment and a net loss of jobs is way off the mark.

Trade is not about the number of jobs in our economy but the quality of jobs. Trade allows Americans to produce more of what we are best at producing-such as soybeans, corn, chemicals, pharmaceuticals, aircraft, high-tech machinery and components, and financial services. In exchange, we import those goods that others are best at producing-such as shoes, clothing, bananas, furniture, toys and sporting goods, consumer electronics, lumber and crude oil. We also swap more sophisticated products with other developed countries, such as cars and telecommunications equipment, allowing producers to enjoy economies of scale by spreading fixed costs among a larger number of customers. In this way, we “trade up” to more productive and better paying jobs.

Like technology, trade allows American workers to be more productive. That in turn allows American employers to raise wages without raising the prices of final products at home or in global markets. We can and do compete against workers earning a fraction of our wages, because workers in poor countries are typically much less productive than the typical American worker.

Competition from imports causes some industries to contract, reducing employment in those sectors. But imports are not the only or even the major cause of job dislocation in our economy. Most layoffs are caused by domestic competition, new technologies, production methods, and changing market conditions. If workers and capital are free to shift in our economy, trade creates other jobs through exports and foreign investment in the United States. The overall level of employment is determined, not by the level of trade, but by broader macroeconomic factors such as interest rates, domestic demand, labor market flexibility, and investor confidence.

It would be unfair to blame a rising level of imports for our current economic troubles because, for much of the period since the slowdown began, the level of imports has been falling. In 2001, when manufacturing output was falling 4.1 percent from the year before, real imports of manufactured goods were falling 5.4 percent after four straight years of double-digit increases. The same domestic recession that put the kibosh on domestic manufacturing output also curbed demand for imports.

In contrast, during much of the 1990s, when imports and trade deficits were both rising rapidly, so too was domestic employment and manufacturing output. Between 1994 and 2000, civilian employment in the U.S. economy rose by a net 12 million and the unemployment rate fell from 6.1 percent to 4.0 percent. During that same period, U.S. manufacturing output rose by 40 percent even though the volume of imported manufactured goods doubled during that same period. In the first five years after the passage of the North American Free Trade Agreement, the number of manufacturing jobs in the United States grew by half a million. So there is obviously no relationship between rising imports and a rising unemployment rate.

Trade with China is no exception. The shoes, clothing, furniture, toys, and consumer electronics that make up a big chunk of Chinese imports keep prices down in American stores and raise the real wages of American families, especially those with middle and low incomes. American producers benefit from the lower-cost inputs from China, such as data processing machine parts, computer hard drives, and plastic moldings. Those inputs allow American-based manufacturers to retain their competitive edge in global markets.

Imports from China have grown rapidly in recent years, but they are nothing like a flood. In 2002, Americans bought $125 billion worth of goods made in China-compared to the $10.4 trillion in gross domestic product we produced ourselves. There is nothing wrong with Americans spending 1 percent of our income on products made by the 20 percent of mankind that lives in China.

As another Labor Day weekend passes, Americans should consider trade and prosperity as a package deal. The more we prosper, the more we trade, and the more we trade, the more we prosper.