The United States has a massive trade deficit with China. It has grown since the end of the Great Recession. The growth of that deficit almost entirely explains the failure of manufacturing employment to fully recover along with the rest of the economy. And as other studies have suggested, the trade deficit has cost us millions of jobs since China entered the World Trade Organization (WTO) in 2001.
The growth of the trade deficit means that the United States is both losing jobs in manufacturing (in electronics and high tech, apparel, textiles, and a range of heavier durable goods industries) and missing opportunities to add jobs in manufacturing (in exporting industries such as transport equipment, agricultural products, computer and electronic parts, chemicals, machinery, and food and beverages) because imports from China have soared, and exports have increased much less. The trade deficit with China 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 and incomes of typical workers and widening inequality.
Following are the specific problems that call for a policy response:
U.S. jobs lost are spread throughout the country but hit hardest in manufacturing, including in industries in which the United States has held a competitive advantage
Due to the trade deficit with China 3.4 million jobs were lost between 2001 and 2015, including 1.3 million jobs lost since the first year of the Great Recession in 2008. Nearly three-fourths (74.3 percent) of the jobs lost between 2001 and 2015 were in manufacturing (2.6 million manufacturing jobs displaced).
The growing trade deficit with China has cost jobs in all 50 states and the District of Columbia, and in every congressional district in the United States.
The trade deficit in the computer and electronic parts industry grew the most, and 1,238,300 jobs were lost or displaced, 36.0 percent of the 2001–2015 total. As a result, many of the hardest-hit congressional districts (in terms of the share of jobs lost) were in California, Texas, Oregon, Massachusetts, Minnesota, and Arizona, where jobs in that industry are concentrated. Some districts in Georgia, Illinois, New York, and North Carolina were also especially hard-hit by trade-related job displacement in a variety of manufacturing industries, including computer and electronic parts, textiles and apparel, and furniture. In addition, surging imports of steel, aluminum, and other capital intensive products threaten hundreds of thousands of jobs in these key industries as well.
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 parts industry as well as other sectors such as biotechnology, life sciences, aerospace, and nuclear technology. In 2015, the United States had a $120.7 billion deficit in advanced technology products with China, and this deficit was responsible for 32.9 percent of the total U.S.–China goods trade deficit. In contrast, the United States had a $28.9 billion surplus in advanced technology products with the rest of the world in 2015.
Wage losses have hurt not just manufacturing workers but workers who don’t have a college degree
Between 2001 and 2011 alone, growing trade deficits reduced the incomes of directly impacted workers by $37 billion per year, and growing competition with imports from China and other low wage countries reduced the wages of all non–college graduates by $180 billion per year. Most of that income was redistributed to corporations, and to workers with college degrees in the very top of the income distribution, in higher profits and wages.
There are reasons for China’s large and growing trade surpluses with the United States and the world that go far beyond the free market
China both subsidizes and dumps massive quantities of exports. Specifically it blocks imports, pirates software and technology from foreign producers, manipulates its currency, invests in massive amounts of excess production capacity in a range of basic industries, often through state owned enterprises (SOEs) (investments that lead to dumping), and operates as a refuse lot for carbon and other industrial pollutants. China has also engaged in extensive and sustained currency manipulation over the past two decades, resulting in persistent currency misalignments. Other countries in the region have found it attractive to follow (and difficult to resist following) China’s lead in engaging in currency manipulation, resulting in the region’s large and growing trade surpluses with the United States and the world over the past 15 years.
China’s actions call for direct policy responses
To adequately respond to these threats, Congress and the president should enhance enforcement of fair trade laws and treaty obligations (through anti-dumping, countervailing duty, and WTO case filings) and implement better early warning systems and mechanisms for responding to import surges. The United States should also make Chinese excess production capacity a priority to address in bilateral negotiations as it is this excess capacity that fuels dumping of exports in the United States. In particular, overcapacity should be addressed by reforming state-owned enterprises, barring China from all U.S. government procurement contracts, and prohibiting SOEs from foreign direct investment in U.S. manufacturing or high tech companies. The United States should also consider imposing a border-adjustable carbon fee on imports produced by energy-intensive industries. In addition, World Trade Organization nations should continue to treat China as a nonmarket economy in fair trade enforcement, because granting China market-economy status would curb the ability to impose tariffs on dumped goods and thus allow Chinese companies to undercut domestic production by flooding WTO nation markets with cheap goods. Also, China should not be rewarded for its market distortions with a bilateral investment treaty. Lastly, the United States must maintain currency vigilance and perhaps even consider negotiating a new Plaza Accord to rebalance currencies and global trade.
China isn’t the only beneficiary from its unfair trade policies; U.S. multinationals have gained as well
U.S. national interests in generating domestic production and jobs have suffered while U.S. multinationals have enjoyed record profits on their foreign direct investments.
In short, the U.S.–China trade relationship needs to undergo a fundamental change. In addition to putting an end to the unfair trade practices outlined here, the new terms of this relationship must include action on China’s part to reduce its massive and growing savings glut by raising wages, increasing spending on health care and pensions, and recognizing free and independent trade unions. Through these steps, China can raise consumption and end its persistent trade surpluses.
The U.S. trade deficit with China has increased since China entered into the WTO
U.S. proponents of China’s entry into the World Trade Organization frequently claimed that letting China into the WTO would increase U.S. exports, improve the U.S. trade deficit with China, and create jobs in the United States.1 In 2000, President Bill Clinton claimed that the agreement then being negotiated to allow China into the WTO would create “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).
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 Chinese tariffs and addressing nontariff 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.
However, China’s trade-distorting practices, aided by China’s currency manipulation and misalignment, and its suppression of wages and labor rights, resulted in a flood of dumped and subsidized imports that greatly exceed the growth of U.S. exports to China. These trade-distorting practices included extensive subsidies to industries such as steel, glass, paper, concrete, and renewable energy industries and rapid growth of its state-owned enterprises, both of which generated a massive buildup of excess capacity in a range of these sectors. This excess capacity created a supply of goods far exceeding Chinese consumer demand and China dealt with the oversupply by dumping the exports elsewhere, primarily in the United States.
The promised surge of U.S. exports to China was also hampered by China’s failure to implement certain policies to increase domestic demand for goods, including goods produced by trading partners. Specifically, for China to become a better market for U.S. exports, it needed to stimulate the growth of domestic consumption through policies that would allow workers to organize and bargain collectively, thus raising wages. China also needed to increase domestic consumption through increased social spending and reductions to the country’s massive savings rate. Such policies are all elements of a program of domestic, demand-led growth that the United States, other advanced countries, and international agencies have called on China to implement for many years. But none of these policies have been implemented, and China’s national savings rate has actually increased significantly over the past 15 years (Setser 2016d, IMF 2016b), which has contributed to the growth of U.S. trade deficits (Bernstein 2016).
In addition, the WTO agreement spurred foreign direct investment (FDI) in Chinese enterprises and the outsourcing of U.S. manufacturing plants, which has expanded China’s manufacturing sector at the expense of the United States, thereby affecting the trade balance between the two countries. Finally, the core of the agreement failed to include any protections to maintain or improve labor or environmental standards or to prohibit currency manipulation. (The roles of FDI and of currency manipulation and misalignment in trade balances are explained later in this report.)
As a result of these forces, the U.S. trade deficit with China soared after China entered the WTO.
From 2001 to 2015, imports from China increased dramatically, rising from $102.3 billion in 2001 to $483.2 billion in 2015, as shown in Table 1.2 U.S. exports to China rose at a rapid rate from 2001 to 2015, but from a much smaller base, from $19.2 billion in 2001 to $116.1 billion in 2015. As a result, China’s exports to the United States in 2015 were more than four times greater than U.S. exports to China. These trade figures make the China trade relationship the United States’ most imbalanced trade relationship by far (author’s analysis of USITC 2016a).
Table 1
Overall, the U.S. goods trade deficit with China rose from $83.0 billion in 2001 to $367.2 billion in 2015, an increase of $284.1 billion. Put another way, since China entered the WTO in 2001, the U.S. trade deficit with China has increased annually by $20.3 billion, or 11.2 percent, on average.
Between 2008 and 2015, the U.S. goods trade deficit with China increased $100.8 billion. This 37.9 percent increase occurred despite the collapse in world trade between 2008 and 2009 caused by the Great Recession and a decline in the U.S. trade deficit with the rest of the world of 30.2 percent between 2008 and 2015. As a result, China’s share of the overall U.S. goods trade deficit increased from 32.0 percent in 2008 to 48.2 percent in 2015. (The figures in this paragraph derive from the author’s analysis of USITC 2016a.)
The growing trade deficit with China has led to U.S. job losses
Each $1 billion in exports to another country from the United States supports some American jobs. However, each $1 billion in imports from another country leads 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.3 The net employment effect of trade depends on the changes in the trade balance. An improving trade balance can support job creation, but a growing trade deficit usually results in growing net U.S. job displacement.
This is what has occurred with China since it entered the WTO; the United States’ widening trade deficit with China is costing U.S. jobs. While some imports of parts and components from China have gone into the production of final goods, some of which were then exported to China and the rest of the world, the overall U.S. trade deficit in manufactured products with China and the rest of the world has grown substantially since China entered the WTO.
This paper describes the net effect of the trade on employment as jobs “lost or displaced,” with the terms “lost” and “displaced” used interchangeably. The employment impacts of the growing U.S. trade deficit with China are estimated in this paper using an input-output 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 of which are in the manufacturing sector (see the box titled “Trade and employment models,” as well as the appendix, for details on model structure and data sources). The Bureau of Labor Statistics Employment Projections program (BLS–EP) revised and updated its labor requirements model and related data in December 2013 (accessed by EPI in 2014; see BLS-EP 2014a and 2014b). Our models have been completely revised and updated using the best available data for this report.4
Trade and employment models
The Economic Policy Institute and other researchers have examined the job impacts of trade in recent years by subtracting the job opportunities lost to imports from 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 this type of 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 has 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 Employment Projections program (BLS-EP 2014a), 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.
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. The difference between these two numbers is essentially the jobs displaced by the growing trade deficit, 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 nontraded industries such as retail and home health care pay lower wages and have less comprehensive benefits than traded-goods industries (Scott 2013, 2016a).
As shown in the bottom half of Table 1, U.S. exports to China in 2001 supported 171,900 jobs, but U.S. imports displaced production that would have supported 1,129,600 jobs. Therefore, the $83.0 billion trade deficit in 2001 displaced 957,700 jobs in that year. Net job displacement rose to 3,077,000 jobs in 2008 and 4,401,000 jobs in 2015.
That means that since China’s entry into the WTO in 2001 and through 2015, the increase in the U.S.–China trade deficit eliminated or displaced 3,443,300 U.S. jobs. Also shown in Table 1, the U.S. trade deficit with China increased by $100.8 billion (or 37.9 percent) between 2008 and 2015. During that period, the number of jobs displaced increased by 43.0 percent.
For comparative purposes, the growth of the U.S.–China trade deficit between 2001 and 2015 represents a direct loss of 1.6 percent of U.S. GDP in 2015 (author’s analysis of BEA 2016a). Using a macroeconomic model with standard economic multipliers (see Appendix: Methodology in Scott and Glass 2016 for further details) yields an estimate of 3.4 million jobs displaced by a trade deficit of this magnitude, providing further support for the job displacement estimates shown in Table 1.5
Total jobs lost or displaced between 2008 and 2015 alone amounted to 1,324,000, either by the elimination of existing jobs or by the prevention of new job creation through the displacement of domestic production by imports. Figure A shows visually how 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). On average, 246,000 jobs per year have been lost or displaced since China’s entry into the WTO (as shown in Table 1, last row, and data column four). The continuing growth of job displacement between 2008 and 2015 despite the relatively small increase in the bilateral trade deficit in this period reflects the relatively rapid growth of U.S. imports of computer and electronic parts from China, discussed below, and the fact that the price index for most of these products fell continuously throughout the study period. The share of U.S. imports from China accounted for by computer and electronic parts (in current, nominal dollars) increased from 32.7 percent in 2008 to 36.5 percent in 2015 (according to the authors’ analysis of USITC 2016a).
Figure A
Unfortunately, growing job losses due to outsourcing and growing trade deficits with China are only part of the story.
The rapid growth of U.S. imports of computer and electronic parts from China also highlights the threat to national security imposed by the outsourcing of U.S. defense industries, as explained by Brigadier General John Adams (2015). The outsourcing of the defense industry makes the United States vulnerable to disruption of supply chains for key missile and communications components. Outsourcing has also reduced the quality of military equipment: a congressional report found nearly 1 million counterfeit components in the supply chain for “critical” defense systems (Senate Armed Services Committee 2012). And outsourcing has eroded the capacity of the defense industrial base for cost innovation, knowledge generation, and support for domestic employment (Alliance for American Manufacturing 2016).
Furthermore, China is also a major trading partner with Canada, Japan, Malaysia, Mexico, and Vietnam, all members of the proposed TPP agreement. If an agreement such as the TPP agreement is approved it would provide a backdoor for dumped and subsidized inputs from China and other countries that are not members of the agreement (Scott 2016b).
Next we turn to analysis of direct China trade and job loss in more detail.
The trade deficit and job losses, by industry
The composition of imports from China is changing in fundamental ways, with significant, negative 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 industries such as computers, electrical machinery, and motor vehicle parts. It has developed a rapidly growing trade surplus in these specific industries, and in high-technology products in general.
Table 2 provides a snapshot of the changes in goods trade flows between 2001 and 2015, by industry, for imports, exports, and the trade balance. The rapid growth of the bilateral trade deficit in computer and electronic parts (including computers, parts, semiconductors, and audio and video equipment) accounted for 49.3 percent of the $284.1 billion increase in the U.S. trade deficit with China between 2001 and 2015. In 2015, the total U.S. trade deficit with China was $367.2 billion—$159.3 billion of which was in computer and electronic parts (trade flows by industry in 2001 and 2015 are shown in Supplemental Table 5, available at the end of this document).
Table 2
As evident in the increasing trade balance and also shown in Table 2, imports from China far exceeded exports to China between 2001 and 2015. Table 2 further shows that the growth in manufactured goods imports explained virtually all (99.3 percent) of total growth in imports from China between 2001 and 2015, and included a wide array of products. Computer and electronic parts were responsible for 40.0 percent of the growth in imports in this period, including computer equipment ($55.3 billion, or 14.5 percent of the overall growth in imports) and communications, audio, and video equipment ($72.8 billion, or 19.1 percent). Other major importing sectors included machinery ($25.5 billion, or 6.7 percent), apparel ($25.0 billion, or 6.6 percent) and miscellaneous manufactured commodities ($30.4 billion, or 8.0 percent).
As Table 2 shows, manufacturing was also the top sector exporting to China—76.4 percent of the growth in exports to China between 2001 and 2015 was in manufactured goods, totaling $74.0 billion. Within manufacturing, key export-growth industries included chemicals ($11.2 billion, or 11.6 percent of the growth in exports), aerospace products and parts ($12.8 billion, or 13.3 percent), motor vehicles and parts ($11.0 billion, or 11.4 percent), and machinery ($7.0 billion, or 7.2 percent). Scrap and second-hand goods industries (which support no jobs, according to BLS–EP 2014a models6) accounted for 5.1 percent ($4.9 billion) of the growth in exports.7
Agricultural exports, which were dominated by corn, soybeans, and other cash grains, grew faster than any individual manufacturing industry except for transportation equipment, increasing $15.8 billion (16.3 percent of the total increase) between 2001 and 2015. Nonetheless, the overall scale of U.S. total exports to China in 2015 was dwarfed by imports from China in that year, which exceeded the value of exports by more than 4 to 1, as shown in Table 1.
The import data in Table 2 reflect China’s rapid expansion into higher-value-added commodities once considered strengths of the United States, such as computer and electronic parts, which accounted for 36.5 percent ($176.6 billion) of U.S. imports from China in 2015 (as shown in Supplemental Table 5). 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 (but not broken out in Table 2, which uses U.S. International Trade Commission data).8 ATP includes the more advanced elements of the computer and electronic parts 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 one of the top suppliers of auto parts to the United States, having surpassed Germany (Scott and Wething 2012).
In 2015, the United States had a $120.7 billion trade deficit with China in ATP, reflecting a tenfold increase from $11.8 billion in 2002.9 This ATP deficit was responsible for 32.9 percent of the total U.S.–China trade deficit in 2015. It dwarfs the $28.9 billion surplus in ATP that the United States had with the rest of the world in 2015. As a result of the U.S. ATP deficit with China, the United States ran an overall deficit in ATP products in 2015 (of $91.8 billion), as it has in every year since 2002 (U.S. Census Bureau 2016c).
Job loss or displacement by industry is directly related to trade flows by industry, as shown in Table 3.10 The growing trade deficit with China eliminated 2,557,100 manufacturing jobs between 2001 and 2015, nearly three-fourths (74.3 percent) of the total. By far the largest job displacements occurred in the computer and electronic parts industry, which lost 1,238,300 jobs (36.0 percent of the 3.4 million jobs displaced overall). This industry includes computer and peripheral equipment (670,800 jobs, or 19.5 percent of the overall jobs displaced), semiconductors and components (282,500 jobs, or 8.2 percent), and communications, audio, and video equipment (267,000 jobs, or 7.8 percent). Other hard-hit industries included apparel (204,900 jobs displaced, equal to 6.0 percent of the total), fabricated metal products (161,800, or 4.7 percent), textile mills and textile product mills (117,800, or 3.4 percent), miscellaneous manufactured commodities (127,000, or 3.7 percent), furniture and related products (115,900, or 3.4 percent), plastics and rubber products (78,800,or 2.3 percent), and motor vehicles and motor vehicle parts (49,600, or 1.4 percent). Several service industries, which provide key inputs to traded-goods production, experienced significant job displacement, including administrative and support and waste management and remediation services (211,500 jobs, or 6.1 percent) and professional, scientific, and technical services (183,000 jobs, or 5.3 percent).
Table 3
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 parts from China rose from 23.8 percent in 2001 to 36.5 percent in 2015 (to $176.6 billion, as shown in Supplemental Table 5), the average price indexes (deflators) for most of these products fell sharply between 2001 and 2015—39.7 percent on a trade-weighted basis. Thus, the real value of computer and electronic imports increased more than twelvefold in this period, rising from $19.5 billion to $245.3 billion in 2015 in constant 2005 dollars (author’s analysis of real trade flows—see methodology appendix for data sources and computational details).11
Missed opportunities to create more jobs through fair trade with China
The trade and jobs analysis in this report is focused on the actual jobs gained and lost due to increased trade with China over the past 15 years. This raises the question of what trade and employment could have looked like but for the massive growth of the U.S. trade deficit with China between 2001 and 2015. Most of the growth in this deficit was due to a proliferation of unfair trade arising from a variety of Chinese policies that are discussed below, including China’s excess production capacity in a range of industries, the growth in its state-owned industries, its pervasive dumping of products at below cost and extensive network of illegal subsidies, its persistent, sustained currency manipulation, and its suppression of labor rights.
Evaluation of alternative paths of U.S.–China trade over the past 15 years would require the development of one or more counterfactual scenarios of how trade could have evolved at a detailed level. A full analysis of such scenarios at the level of employment impacts by industry and geographic area is beyond the scope of this report. It will be the subject of future research. But the broad outlines of one such scenario can be quickly sketched from the trade data in Table 2.
To have maintained a stable trade balanced trade with China between 2001 and 2015, imports would have had to grow less rapidly, exports would have had to grow more rapidly, or some combination of the two. For example, had U.S. export growth to China matched the growth of China’s exports to the United States dollar for dollar between 2001 and 2015, balanced trade would have required roughly a fourfold increase in U.S. exports to China in 2015.12 If the 2001–2015 growth in exports in each industry (shown in Table 2) increased by this ratio, then the largest growth in exports would have occurred in transportation equipment ($94.1 billion), agricultural products ($62.0 billion), computer and electronic parts ($47.4 billion), chemicals ($44.1 billion), machinery ($27.3 billion), and food and beverage products ($16.6 billion). In total, U.S. exports to China would have increased by $381.0 billion, $284.1 billion more than they actually did.13
If exports to China had increased at this pace, it would have supported the creation of millions of U.S. manufacturing jobs, and prevented much of the collapse of overall U.S. manufacturing employment between 2001 and 2015, when 3.4 million U.S. manufacturing jobs were lost (BLS 2016c). This level of growth in U.S. exports to China could not have taken place without major, structural changes in China’s trade, industrial, macroeconomic, and labor policies. This analysis does illustrate the potential gains had China trade delivered on the promises made by China trade proponents when China entered the WTO in 2001.
Job losses by state
Growing U.S. 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 and the District of Columbia, as shown in Table 4 and Figure B. (Supplemental Table 1 ranks the states by the number of net jobs displaced, while Supplemental Table 2 ranks the states by jobs displaced as a share of total state jobs and presents the states alphabetically.) Table 4 shows that jobs displaced from 2001 to 2015 due to the growing goods trade deficit with China ranged from 0.79 percent to 3.82 percent of total state employment. The 10 hardest-hit states ranked by job shares displaced were Oregon, California, New Hampshire, Minnesota, North Carolina, Massachusetts, Wisconsin, Texas, Rhode Island, and Vermont. As shown in Supplemental Table 1, the top four states in terms of total jobs lost were California, Texas, New York, and Illinois. California lost 589,100 jobs, compared with 321,300 in Texas, 191,500 in New York, and 149,400 in Illinois. The 3.4 million U.S. jobs displaced due to the growing trade deficit with China between 2001 and 2015 represented 2.45 percent of total U.S. employment.
Table 4
Figure B
Figure B shows the broad impact of the growing trade deficit with China across the United States, with no areas exempt. Job losses have been most concentrated in states with high-tech industries, such as Arizona, California, Colorado, Idaho, Massachusetts, Minnesota, Oregon, and Texas, and in manufacturing states, including New Hampshire, North Carolina, and Vermont. Other hard-hit states include traditional manufacturing powers such as Georgia, Kentucky, Indiana, Illinois, Rhode Island, South Carolina, Tennessee, and Wisconsin.
Job losses by congressional district
This study also reports the employment impacts of the growing U.S. goods trade deficit with China in every congressional district, including the District of Columbia. The top 20 hardest-hit congressional districts are shown in Table 5. Figure C shows job displacement in all 435 congressional districts plus the District of Columbia, as a share of total district employment. (Data for all 435 districts plus the District of Columbia are also provided in Supplemental Tables 3 and 4 at the end of this report.) Because the largest growth in the goods trade deficits with China occurred in the computer and electronic parts industry, many hard-hit congressional districts were in Arizona, California, Illinois, Massachusetts, Minnesota, New York, Oregon, and Texas where remaining jobs in that industry are concentrated. Other states with hard-hit districts include Georgia and North Carolina, which suffered considerable job displacement in a variety of manufacturing industries.14
Table 5
Figure C
Specifically, of the top 20 hardest-hit districts, eight were in California (in rank order, the 17th, 18th, 19th, 15th, 40th, 34th, 52nd, and 45th), four were in Texas (31st, 3rd, 10th, and 18th), and one each in Oregon (1st), Georgia (14th), Massachusetts (3rd), Illinois (6th), Minnesota (1st), New York (18th), North Carolina (2nd) and Arizona (5th). Job losses in these districts ranged from 13,200 jobs to 60,900 jobs, and 4.34 percent to 17.60 percent of total district jobs. These distributions reflect both the size of some states (e.g., California and Texas) and also the concentration of the industries hardest-hit by the growing U.S.–China trade deficit, such as computer and electronic parts and other industries including furniture, textiles, apparel, and other manufactured products. Overall, the 2.6 million manufacturing jobs lost were responsible for 74.3 percent of the 3.4 million jobs displaced by the growing U.S.–China trade deficit between 2001 and 2015 (Table 3).
The three hardest-hit congressional districts were all located in Silicon Valley in California, including the 17th (South Bay, encompassing Sunnyvale, Cupertino, Santa Clara, Fremont, Newark, North San Jose, and Miltpitas15), which lost 60,900 jobs, equal to 17.60 percent of all jobs in the district), the 18th Congressional District (including parts of San Jose, Palo Alto, Redwood City, Menlo Park, Stanford, Los Altos, Campbell, Saratoga, Mountain View, and Los Gatos), which lost 49,500 jobs, 14.37 percent), and the 19th Congressional District (most of San Jose and other parts of Santa Clara County), which lost 39,400 jobs, 12.16 percent of all jobs.
Although the San Francisco Bay Area has experienced rapid growth over the past decade in software and related industries, this growth has come at the expense of direct employment in the production of computer and electronic parts. This manufacturing sector has experienced more actual job losses than any other major manufacturing industry since China joined the WTO.16 There are substantial questions about the long-run ability of firms in the high-tech sectors to continue to innovate while offshoring most or all of the production in their industries (Shi 2010).
Other research confirms job losses from U.S.–China trade
Recent academic research has confirmed findings in this and earlier EPI research (e.g., Kimball and Scott 2014) that the growing U.S.–China trade deficit has caused significant loss of U.S. jobs, especially in manufacturing.
For example, Acemoglu et al. (2014) find that import competition with China from 1999 to 2011 was responsible for up to 2.4 million net job losses (including direct, indirect, and respending effects).17 This result compares with the finding in this paper that 2.9 million jobs were lost due to growing trade deficits with China between 2001 and 2011, as shown in Figure A (interactive data, available on the web). Thus, over a roughly comparable period, Acemoglu et al. estimate an employment impact that is roughly 80 percent as large as the estimate found in this study.18
Further academic confirmation of the impacts of China trade on manufacturing employment is provided by Pierce and Schott (2016). The authors use an entirely different estimation technique based on differences in the pre- and post-China WTO entry maximum tariff rates, with and without permanent normal trade relations status (PNTR), which the United States granted to China in the China–WTO implementing legislation. Pierce and Schott estimate the impacts of changes in U.S. international transactions between 1992 and 2008. They find that the grant of PNTR status to China “reduced relative employment growth of the average industry by 3.4 percentage points … after one year [and] 15.6 percentage points after 6 years” (following the grant of PNTR status to China in 2001). They do not translate percentage-point changes in employment into total jobs displaced, but data on changes in total manufacturing employment in this period provide a base of comparison.
The research in this paper looks at the total loss or displacement of jobs due to the growing trade deficit with China and the number of those lost jobs that are manufacturing jobs. We can check the consistency of this finding with a different approach—looking at the total loss of manufacturing jobs and estimating the number of those job losses that are due to growing trade deficits with China. The United States lost 3.4 million manufacturing jobs between December 2001 and December 2015, a decline of 21.5 percent in total manufacturing employment (BLS 2016c). Drawing from Pierce and Schott (2016) above, if 15.6 percentage points of this 21.5 percent decline can be attributed to the growth of the U.S. trade deficit with China, this implies that about 72.6 percent (or 2.5 million) of the manufacturing jobs lost in this period were lost due to the growing trade deficit with China. This estimate is nearly identical to this study’s estimated total manufacturing jobs displaced by the growing U.S.–China trade deficit (2.6 million net jobs displaced). Thus, two other recent academic studies have concluded that the growing U.S.–China trade deficit is responsible for the displacement of at least 1 to 2 million U.S. manufacturing jobs since 1990, with most jobs lost since China entered the WTO in 2001.
Lost wages from the increasing trade deficit with China
Growing trade-related job displacement has several direct and indirect effects on workers’ wages and incomes. The direct wage effects are a function of the wages foregone in jobs displaced by growing U.S. imports from China minus potential gains from the growth of jobs supported in export-producing industries and the wages available in alternative jobs in nontraded industries. (U.S. workers displaced from traded-goods production in manufacturing industries who find jobs in nontraded goods industries experience permanent wage losses, as discussed below). Scott (2013) estimates the gains and losses associated with direct changes in employment caused by growing U.S.–China trade deficits between 2001 and 2011.19 The key finding in that study is that jobs displaced by imports from China actually paid 17.0 percent more than jobs exporting to China: $1,021.66 per week in import-competing industries versus $872.89 per week in exporting industries (Scott 2013, 24, Table 9a). Standard trade theory assumes that economic integration leads to “gains from trade” as workers move from low-productivity jobs in import-competing industries into higher-productivity jobs in export-competing industries. However, this assumption is proven incorrect in Scott (2013), which showed that import-competing jobs pay better than alternative jobs in export-producing industries. Therefore, simple trade expansion which increases total trade, with no underlying change in the trade balance, will result in a net loss to workers as they move from higher-paying jobs in import-competing industries to lower-paying jobs in exporting industries.
Furthermore, jobs in both import-competing and exporting industries paid substantially more than jobs in nontraded industries, which pay $791.14 per week (Scott 2013, Table 9a, 24). Between 2001 and 2011, growing exports to China supported 538,000 U.S. jobs, but growing imports displaced 3,280,200 jobs, for a net loss of 2.7 million U.S. jobs (Scott 2013, Table 5, 13). Thus, not only did workers lose wages moving from import to export industries, but 2.7 million workers were displaced from jobs making $1,021.66 per week on average, and (if they were lucky enough to find jobs) were mostly pushed into jobs in nontraded industries paying an average of only $791.14 per week (a decline of 22.6 percent). In total, U.S. workers suffered a direct net wage loss of $37 billion per year (Scott 2013, 26, Table 9b) due to trade with China. But the direct wage losses are just the tip of the iceberg.
As shown by Josh Bivens in Everybody Wins, Except for Most of Us (Bivens 2008a, results updated in Bivens 2013), growing trade with China essentially puts all American workers without a college degree (roughly 100 million workers) in direct competition with workers in China (and elsewhere) making much less. He shows that trade with low-wage countries was responsible for 90 percent of the growth in the college wage premium since 1995 (the college wage premium is the percent by which wages of college graduates exceed those of otherwise equivalent high school graduates). The growth of China trade was responsible for more than half of the growth in the college wage premium in that period, Bivens finds. To put these estimates in macroeconomic terms, in 2011, trade with low-wage countries lowered annual wages by 5.5 percent—roughly $1,800 for all full-time, full-year workers without a college degree. To provide comparable economy-wide impact estimates, assume that 100 million workers without a college degree suffered total losses of $1,800 per year, which yields a total national loss of $180 billion.20 Therefore, the indirect, macroeconomic losses to U.S. workers without college degrees caused by growing trade with low-wage nations were about five times as large as the direct impact of $37 billion in direct wage losses in 2011 from trade with China, and about 40 times as many workers were affected indirectly due to globalization’s wage lowering effect (100 million) as were displaced by trade with China (2.7 million).21 And China trade alone was responsible for about 56.8 percent of the increase in the overall college/non-college wage gap between 1995 and 2011.22
Additionally, Autor, Dorn, and Hanson estimate that rising exposure to low-cost Chinese imports lowers labor force participation and reduces wages in local labor markets; in particular, they find that increased import competition has a statistically significant depressing effect on nonmanufacturing wages (Autor, Dorn, and Hanson 2012, abstract). This confirms the findings of Bivens (2008a, 2013). They also find that “transfer benefits payments for unemployment, disability, retirement, and healthcare also rise sharply in exposed labor markets” and that “for the oldest group (50–64), fully 84% of the decline in [manufacturing] employment is accounted for by the rise in nonparticipation, relative to 71% among the prime-age group and 68% among the younger group” (Autor, Dorn, and Hanson 2012, abstract, 25). Thus, Autor, Dorn, and Hanson find that more than two-thirds of all workers displaced by growing competition with Chinese imports dropped out of the labor force. These results are explained, in part, by the finding that “9.9% … of those who lose employment following an import shock obtain federal disability insurance benefits [Social Security Disability Insurance or SSDI benefits].” Additionally, “rising import exposure spurs a substantial increase in government transfer payments to citizens in the form of increased disability, medical, income assistance and unemployment benefits.” Moreover, “these transfer payments vastly exceed the expenses of the [Trade Adjustment Assistance] TAA program, which specifically targets workers who lose employment due to import competition” (Autor, Dorn, and Hanson 2012, 25, 30). In Autor and Hanson (2014), the effects are totaled, and they find that “for regions affected by Chinese imports, the estimated dollar increase in per capita SSDI payments is more than 30 times as large as the estimated dollar increases in TAA payments.”
Summing up the overall impact of the growing U.S.–China trade deficit on jobs and wages
The growing trade deficit with China has 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. According to the most recent Bureau of Labor Statistics survey covering displaced workers (BLS 2016b), more than one-third (36.7 percent) of manufacturing workers displaced from January 2013 to December 2015 were still not working, including 21.7 percent who were not in the labor force, i.e., no longer even looking for work.
U.S. workers who were directly displaced by trade with China between 2001 and 2011 lost a collective $37.0 billion in wages as a result of accepting lower-paying jobs in nontraded industries or industries that export to China assuming, conservatively, that those workers are re-employed in nontraded goods industries (Scott 2013)23. Worse yet, growing competition with workers in China and other low-wage countries reduced the wages of all 100 million U.S. workers without a college degree, leading to cumulative losses of approximately $180 billion per year in 2011 (Bivens 2013, Scott 2015b). The lost output of unemployed workers, especially that of labor force dropouts, can never be regained and is one of the larger costs of trade-related job displacement to the economy as a whole.
Trade adjustment assistance (TAA) is a Department of Labor program to provide retraining and unemployment benefits to certain workers who were displaced by growing imports. However, new research suggests that significant shares of displaced workers are signing up for disability and retirement benefits, other government income assistance, and government medical benefits, in addition to temporary trade adjustment assistance. Many of these workers, such as those on disability and retirement, are permanently dropping out of the labor force, resulting in permanent income losses to themselves and the economy. TAA benefits represent only a tiny share of the costs of adjustment. Examining only those costs for which workers actually qualify for government benefits, Autor, Dorn, and Hanson (2012, Figure 7 at 32) find that unemployment and TAA benefits represent only 6.3 percent of the total benefit costs associated with a $1,000 increase in imports per worker in commuting zones, over the 1990–2007 period.24 Given the low level of coverage of social safety net programs in the United States, versus other developed countries (such as the EU), actual adjustment costs for displaced workers are likely substantially larger than the actual U.S. benefits estimated by Autor, Dom, and Hanson.
Some economists and others in the trade debate 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.25 However, while the trade balance is but one of many variables affecting aggregate job creation, it plays a large role in explaining structural change in employment, especially in the manufacturing sector. As noted earlier, between December 2001 and December 2015, 3.4 million U.S. manufacturing jobs were lost (BLS 2016c). The growth of the U.S. trade deficit with China was responsible for the displacement of 2.6 million manufacturing jobs in this period, or about 75.4 percent of manufacturing jobs lost. Thus, manufacturing job loss due to the growing trade deficit with China accounts for roughly three-fourths of all U.S. manufacturing jobs lost or displaced in this period.
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. Even if macroeconomic policy is adjusted to offset the negative impact of the growing trade deficit with China on total employment, the structure of production and employment in the United States has been negatively affected (Scott 2016a).
Many of the mechanisms that could offset employment losses caused by growing trade deficits are not operating in the current economic climate. The Federal Reserve policy interest rates are still quite low, and interest-rate-sensitive industries such as residential construction are not experiencing employment gains from lower rates.26 In short, in today’s economy with its relatively high levels of workers not in the labor force, jobs displaced due to the trade deficit with China are much more likely to be actual economy wide losses than simply job reallocations.
Threats to national security
The rapid growth of U.S. imports of computer and electronic parts from China also represents a threat to national security because it is connected to the outsourcing of U.S. defense products, as explained by Brigadier General John Adams (2015). The outsourcing of the defense industry makes the United States vulnerable to disruption of supply chains for key missile and communications components. Outsourcing has also reduced the quality of military equipment: a congressional report found nearly 1 million counterfeit components in the supply chain for “critical” defense systems (Senate Armed Services Committee 2012). And outsourcing has eroded the capacity of the defense industrial base for cost innovation, knowledge generation, and support for domestic employment (Alliance for American Manufacturing 2016).
Threats to national wealth, savings, and income
Rising overall U.S. trade deficits with China and the world as a whole led to offsetting inflows of capital to finance these deficits. As a result, the United States net international investment position (NIIP) declined from -$2.3 trillion in 2001, before China joined the WTO, to $-7.2 trillion in 2015 (BEA 2016b). Growing U.S. trade deficits with China effectively transferred 3.4 million U.S. jobs to that country, and those deficits were financed by transferring trillions of dollars of U.S. wealth over the past fifteen years, largely to the People’s Bank of China, as shown below.27 Meanwhile, net U.S. borrowing, as reflected in the NIIP, has increased by $4.9 trillion in this period, more than trebling our net international debt (BEA 2016b).
Each year that the United States runs a trade deficit is a year that it must borrow from abroad to finance this excess of consumption over domestic production.28 This is because of the relationship between trade flows, savings, and investment in the domestic and international economies (see text box, “How countries running a trade deficit finance consumption and investment.”) This borrowing leads to growing foreign debt that must be paid, with interest (Bivens 2008). In 2015, the U.S. borrowing was roughly $1.3 billion per day.
Australia provides a good example of the consequences of such borrowing. In recent years, the Australian goods and services trade deficit has averaged around 2 percent of gross domestic product, yet Australia’s total deficit of international credits over debits reached 6 percent of GDP.29 The 4 percentage-point gap between the trade and total deficit was debt service (i.e., interest) paid on the borrowing to cover the previous year’s accrued trade deficits.
Were Australia ever to achieve balanced trade on goods and services, it would have to pay interest on its accumulated foreign debt forever, or until those debts were paid off (by running trade surpluses). In this case, Australia would be required to generate an excess of national production (income) in excess of consumption equal to at least four percent of GDP. This amounts to a tax on future generations that must be paid in order to pay for today’s (and past) consumption in excess of production. There are no free lunches in the global economy.
This large income flow leaving Australia to pay interest on accumulated foreign debt should be a red flag for the future of the U.S. economy. The United States ran a trade surplus in nearly every year between 1946 and 1975, and by 1975 had become the largest net lender in the world.30 The United States has run increasingly large trade deficits in every year since 1976, and has become the world’s largest net debtor. Thus, trade deficits are associated with job losses, as noted above, and also with the need to making growing payments of national income in order to service growing levels of net foreign debt.31
Running trade deficits or surpluses has both benefits and costs for any given economy. Whether a country should run a trade surplus (and export capital) depends in part on its level of economic development. In general, large trade deficits and surpluses (relative to total global output), and large net capital flows, are destabilizing to the global economy and in most cases should be avoided.
Foreign capital inflows can destabilize the domestic economy, as they did in the great housing bubble of 2001 to 2007, as explained by former Federal Reserve chairman Ben Bernanke (2005) in his work on the “housing glut.” Such bubbles (which have recurred several times in the past 40 years in the United States) are one reason why large, global trade imbalances are destabilizing. In these cases, the structure of the domestic economy has become “imbalanced,” in the sense that the housing sector has become too large to be sustainable in long-run equilibrium, and the manufacturing sector too small to maintain the number of good, family-sustaining jobs needed to support working-class families.32 The consequences in the case of the “housing glut” were unbelievably catastrophic—the largest economic recession since the great depression, resulting in more than a decade’s worth of lost income and wages that will never be recovered by current or future citizens, workers, and families.
On the other hand, it is often appropriate for poor, developing countries to run trade deficits, which also generate capital inflows. Such countries are usually underdeveloped in part because of a shortage of invested capital. Rates of return on capital are typically much higher than in developed countries, and the returns to these societies of importing capital (if well managed) typically greatly exceed the costs of international borrowing. Thus, most development scholars and economists think that it is appropriate for developing countries to run trade deficits offset by small trade surpluses in developed countries, which can benefit from the higher rates of return on capital invested in poor countries, relative to advanced, developed economies.
China and other Asian economies that have pursued export-led growth strategies (such as Japan, South Korea, Singapore, Taiwan, Thailand, and Malaysia) have turned this economic model on its head. These countries have suppressed domestic consumption to generate excess domestic savings and large trade surpluses. These strategies are based, in large part, on currency manipulation, which as explained below involves making large government investments in foreign assets (e.g., foreign exchange reserves) generating artificially undervalued currencies, resulting in growing trade surpluses. Thus, the growing trade and capital account surpluses accumulated by these countries are in essence, self-fulfilling strategies predicated on abuse of well-established norms of competitive market behavior and models of economic development.
How countries running a trade deficit finance consumption and investment
In a simple economy with no trade (that is, a closed economy), in order to grow, that economy needs investment dollars.33 It gets them from savers, who put their savings in banks, which lend them out to investors. In this closed economy with no trade, savings equals investment, and investment is thus constrained by the level of savings in the domestic economy (Bernstein 2015, 127-129). In the language of economists,
(1) S = I
Where S is domestic savings and I equals domestic investment.
In an open economy (ignoring the role of government spending, G, and taxation, T, usually included in the standard model), domestic investment is no longer constrained by the level of domestic savings. In this model, all output is equal to income of the various factors of production in society (wages, profits, rent, and interest). In this economy, all income must be either consumed (C) or saved (S), so output (GDP) is just equal to income, (Y), with exports (X) and imports (M) representing the trade balance (X – M):
(2) GDP = Y = C + I + X – M
In this economy, all income must be either consumed or saved, so output (GDP) is just equal to income:
(3) Y = C + S
And, combining equations 2 and 3,
(4) C + S = C + I + X – M
And, subtracting C from each side of this equation yields and rearranging:
(5) S + M = I + X
(6) I = S + (M – X)
So, in an open econ