The United States had a goods and services trade deficit of approximately $463.5 billion in 2013, which cost millions of U.S. jobs. Contrary to the well agreed-upon fact that trade deficits lead to job loss, the Business Roundtable (BRT) has sponsored a study which claims to show that U.S. goods and services trade (both imports and exports) supported nearly 40 million U.S. jobs in 2013. They achieve these results with a highly distorted model which looks at what would happen if all U.S. exports and imports of goods and services were eliminated “by imposing prohibitive duties against” U.S. goods and service trade.
[Reposted from the Economic Policy Institute blog | Robert Scott | March 3, 2015]
The silliness of this approach is obvious. The BRT study arrives at its conclusions by assessing how many people would be out of work if the vast majority of workers involved in producing or using traded goods just stopped working. But that’s not how the economy works in the real world. If one assumes away 30 percent of the U.S. economy, one of course assumes away about 30 percent of the jobs. It’s irrelevant to the policy question of whether our trade should be balanced, and it falsely assumes that imports have the same positive employment impacts as exports, when, in fact, imports tend to reduce domestic employment by reducing domestic production.
Using a simple and straightforward macroeconomic model described here, I estimate that the U.S. trade deficit resulted in a net loss of 5.3 million U.S. jobs in 2013. Claims that U.S. trade deficits supported millions of U.S. jobs cannot be justified with any reasonable set of macroeconomic models or assumptions.
The BRT study also claims that two massive, proposed trade and investment deals (the Trans-Pacific Partnership or TPP, and the Transatlantic Trade and Investment Partnership or TTIP) would benefit the U.S. economy. It supports the claim by imagining what would happen if all trade with these countries were eliminated—a proposal no one has made. Any serious debate must focus on how the deals will affect trade at the margin, whether they will do more to stimulate exports or imports, and whether they will increase or decrease U.S. trade deficits. Most other major trade investment deals, including those with Mexico, Korea, and China, have resulted in growing trade deficits and job losses, so the burden of proof is on those who support these deals to show that they will have different outcomes. The study sheds no light on these questions because its assumptions are fatally flawed.
The fact is, the United States had a goods and services trade deficit of approximately $135 billion in 2013 with the European Union and members of the proposed Trans-Pacific Partnership. This trade deficit made up 29.2 percent of the total U.S. trade deficit in 2013, and was responsible for approximately 1.5 million of the total of 5.3 million U.S. jobs displaced by the U.S. trade deficit in 2013.
The Business Roundtable’s strange model
The BRT study assumes that all U.S. trade in 2013 is eliminated with prohibitively high tariffs and—absurdly—that the vast majority of workers in jobs directly or indirectly supported by that trade engage in no replacement economic activity. It also assumes that wages are fixed at pre-tariff levels, preventing labor markets from adjusting to changes in tariffs and other prices. Lastly, it assumes that workers in traded goods industries earn higher wages (ignoring that wages in the production of goods displaced by imports are higher, on average, than wages in the production of goods the U.S. exports), and that “workers spend those wages on goods and services.” (In other words, their model includes respending multipliers.)
Under the BRT model the United States would fall into the largest depression experienced in more than a century. Total U.S. employment would decline by 39.8 million, or 29.0 percent in 2013 (as opposed to the actual 6.3 percent decline experienced in the Great Recession, between 2007 and 2009, and the 18.4 percent employment decline in the Great Depression, between 1929 and 1933). The BRT study authors then assume that the benefits of trade are equal to net positive effects of eliminating such massive, prohibitive tariffs from the economy.
The study uses a Computable General Equilibrium (CGE) model in its analysis. Such models are typically used to analyze the effects of small changes in tariff and non-tariff trade barriers on one or more countries. They are not appropriate to analyze the impacts of massive macro-economic disturbances to economic output or employment, such as those that would result from the total elimination of all U.S. goods and services exports and imports.
When analyzing the effects of trade on employment, the issue is simple: Increased exports support U.S. jobs and increased imports cost U.S. jobs. Thus, it is trade balances—the net of exports and imports—that determine the number of jobs created or displaced by trade agreements. Unless trade deals reduce the U.S. trade deficit, they will not have a net positive effect on U.S. employment. Rather than reducing trade deficits, past trade deals have actually been followed by larger trade deficits, as noted above.
Unlike the absurd assumptions of the BRT report, this is textbook economics. Most macroeconomic models are based, in part, on a straightforward national income accounting identity, with total spending (Y) defined as:
Y = C + I + G + X – M
Where C is consumer spending, I is investment spending, G is government purchases of goods and services, X is exports, and M is imports.
While trade agreements lead to higher X, they also lead to higher M. Exports support demand for domestically produced goods, so higher X increases employment. However, the growth of imports reduces demand for domestically produced goods, which reduces domestic employment.
Each $1 billion in exports from the United States supports some American jobs. However, each $1 billion in imports displaces the American workers who would have been employed making these products in the United States. The net employment effect of trade depends on the size of the total U.S. trade balance.
A straightforward alternative to the BRT model
This analysis uses a macroeconomic model developed by Bivens (see especially his Table 5) to estimate the effects of the U.S. goods trade deficit on U.S. Gross Domestic Product (GDP) and employment, including respending effects. In 2013, the U.S. labor force remained depressed, with levels of labor market participation near lows reached at the nadir of the recession in 2009. In this economic environment, changes in spending for domestic goods have large multiplier effects on the economy. Bivens estimates that in the current economic environment, changes in exogenous spending on goods and investment have a large, macroeconomic multiplier impact of 1.6 on the domestic economy through the wages earned and spent by workers employed by such spending. This paper assumes that changes in trade flows also have a multiplier effect of 1.6.
The Bivens model is used to estimate the overall impact of the U.S. trade deficit on U.S. GDP. The overall number of jobs supported by this reduction in output (GDP) is estimated from a simple rule of thumb, based on historical relationships between output and employment in which each 1 percent increase in GDP supported 1.2 million jobs in the economy. Likewise, an identical reduction in GDP would eliminate 1.2 million jobs in the U.S. economy.
The BRT study estimated that the U.S. goods and services trade deficit was $463.5 billion in 2013. With a multiplier of 1.6, this trade deficit reduced U.S. GDP by $741.6 billion in that year. Using the employment/output rule of thumb, the U.S. trade deficit in 2013 eliminated 5.3 million U.S. jobs in that year.