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Heritage Foundation’s view on China trade and jobs is like old wine that’s aged badly

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Reposted from the Economic Policy Institute blog

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Heritage Foundation’s view on China trade and jobs is like old wine that’s aged badly

Robert E. Scott  |  October 31, 2012  |  Economic Policy Institute blog

A recent blog post by the Heritage Foundation’s Derek Scissors claims that my estimates of the number of jobs lost due to growing trade deficits with China “are demonstrably wrong.” Scissors then fails to demonstrate how they’re wrong.

That’s because he can’t. The economic models used in our report (Scott 2012, 9, Appendix and note 15) are the gold standard for research on the employment effects of trade, and “all but identical models” have been used in similar studies by the Federal Reserve Bank of New York, byMartin Bailey and Robert Lawrence of the Brookings Institution, and in aU.S. Commerce Department study that represents the work of more than 20 government economists including the chief economists from that agency and the Office of the U.S. Trade Representative.

At its core, our model is based on a straightforward application of Keynesian economics and national income accounting, which show that exports stimulate the domestic economy while imports reduce demand for domestic products. Scissors (and many others before him, such asDan Griswold at Cato and the U.S. China Business Council) claims that imports are good for the economy, in part because they are correlated with growth. But this assertion ignores two fundamental questions:  Do we really need to have the trade deficit grow as a precondition for output growth; and what is the counterfactual? Our model provides a clear answer to the second question: growing trade deficits with China cost 2.7 million U.S. jobs between 2001 and 2010. Using an entirely different statistical technique, David Autor, David Dorn and Gordon Hanson conclude that between 1990 and 2007, rising exposure to imports from China “increases unemployment, lowers labor force participation, and reduces wages in local labor markets. Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment,” or about 900,000 jobs. In addition, they found that “transfer benefits payments for unemployment, disability, retirement, and healthcare also rise sharply in exposed labor markets.”

But was the growth of trade deficits with China inevitable, given its rapid growth and development over the last two decades? Definitely not. For one, textbook macroeconomics actually predict that poorer countries (like China) should actually be expected to run trade deficits with richer nations, as capital should flow from the U.S. to China to chase higher returns there. Further, other rich countries manage to engage in global trade without running chronic trade deficits. Germany, for example, has enjoyed rapidly growing global trade surpluses for the past decade. GDP per capita has grown twice as fast in Germany as it has in the United States between 2000 and 2011, and it recovered much more quickly from the global financial crisis than this country. Thus, growth in an advanced industrial economy doesn’t have to be positively correlated with the growth of imports, or of trade deficits.

Lastly, Scissors purports to show that growing import of clothes and toys from China support more than 500,000 U.S. jobs in transportation, port services, wholesale and retail sales, store construction, marketing, real estate, and financial services. The Heritage blog post, and a related report, fail to recognize that if toys and apparel imported from China were produced in the United States instead, those ancillary jobs and services would still be required to transport and market the same types of products. For these reasons, our model explicitly excludes wholesale and retail trade and advertising services associated with imports and exports. The Scissors model effectively double-counts jobs in these industries that would have existed whether those goods were imported or domestically produced.

In the 1990s, many economists scoffed at the notion that free trade agreements and growing trade deficits would cost large numbers of jobs in the domestic economy (see:Krugman and Lawrence 1994Rowthorn and Ramaswamy, 1999). These views have now been accepted by the mainstream of the profession. Scissors and his friends at Cato and in the China lobby represent a discredited, minority point of view. They live in a theoretical world where labor markets adjust instantaneously, there is no unemployment, displaced workers are ignored, and a job gained at Walmart is just as good as one lost at General Motors. It’s old wine, and it’s badly spoiled.

6 Responses to “Heritage Foundation’s view on China trade and jobs is like old wine that’s aged badly”

  1. Joe Brooks says:

    The once great Heritage Foundation has become a “front” for free traders, Multi-Nationals and Foreign Lobbyists. Below is a comment that I made on their site and it was censored [removed].

    “The truth is, the US does not compete in the real world of International Trade, at all.

    150 other nations have Import Tariffs, Value Added Taxes [Bribes], Currency Manipulation, Border Duties, that add up to a 300% import tariff in many cases. The US has an average 2.5% import tariff, the lowest in the world.

    The US has by far, the largest Trade Deficit in history. “free trade” = looting.”

    • Mo says:

      Joe you made good points. What the Heritage Foundation also seems to forget that comparative advantage, free trade and sound money all go together. You can’t have comparative advantage and free trade work with fiat money. How could you have free trade with fiat money which is money created at will be central banks that benefit certain special interests at the expense of others? Also where in free trade theory says that the gov’t has to subsidize offshoring with tax incentives and lines of credit created out of thin air?

      The reason Washington doesn’t want to change the status quo with trade is threefold. First the multinationals that make larger profits by having China subsidize their production are very influential in Washington. Second, the US uses tech transfers as a way of getting foreign policy concessions. Third, countries like China allow the US to export inflation where the US exports fiat money and receives real goods in return. This is why so many countries have billions if not trillions of US dollar assets. By being able to export inflation it allows the gov’t to keep price indexes like the CPI lower than it normally would have been. With inflation exported, it allows the US gov’t to continue to spend on foreign policy and world policing objectives. This would explain why the Federal Reserve had no ojections to offshoring.

      Under sounder money, there wouldn’t be an offshoring bubble. Only inflation under a fiat monetary system could distort prices in a country’ structure of production and cause it to be cheaper to pay and have a factory stripped down and shipped overseas, pay to find and create a whole new supply chain overseas, re-export the product back to the US and pay all the adminstrative costs of having a global supply chain like accounting costs, etc.

  2. Tom Neppl says:

    I am always amazed at the argument that more imports are good for the economy. No doubt there are benefits, we would all agree that reciprocal trade is good but its so blatantly obvious that unbalanced trade can be a bad thing. And moving products around only adds cost (not value) so those jobs are not nearly as beneficial to the economy. We are increasing the standard of living in the world on borrowed money.

    There is validity to the argument that lower cost goods are better but that ends when it sacrifices our economic health and ultimately our sovereignty; unless you have a global perspective which says sovereignty is an outdated concept.

    One positive – we are seeing a trend of manufacturing coming back. The great experiment with China is not what a lot of folks thought it would be. Total costs are much higher than anticipated, not to mention piracy.

    Now there is however genuine concern that we have stripped our productive capacity and failed to grow the workforce for the future. Several decades of steering our kids into other career options. In manufacturing we cannot find skilled workers, a product of de-industrializing our nation and taking away opportunity for good jobs and careers.

    There is a lot more gray hair in agriculture and manufacturing these days.

  3. Steve Martin says:

    I would have liked to have seen Heritage’s role in NAFTA (i.e. they WROTE IT) covered in more detail here. My understanding is that Newt, the Slimy Chameleon, Gingrich was their chief cheerleader on this issue in the early 90s.

    It sounds like some here think that Heritage has only recent become a den of internationalist FREE TRAITORS…lol…

    For the Republic and Its Creator,

    Steve Martin
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    780 AM in Monticello, 1700 AM in Lewiston, 88.1 FM in Westbrook, 88.1 FM in Portland, 88.1 FM in Orono, 96.5 FM in Brewer, Maine.
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  4. The Protectionist says:

    Geldstone makes it simple: There has never been a sound theory of economics. Macro and micro are flawed because they are based on a radically flawed definition of money. In fact, money is an after thought in mainstream economics which allows their foundation of supply and demand based pricing to survive in the industrial age (i.e. modern economics is built on barter–no joke). With money as a veil, prices are infinitely flexible (i.e. essentially the mechanism of real estate pricing–i.e. limited supply pricing instead of a cost of production model). Geldstone suggests the yet to be recognized primary function of money (lacking in every textbook_ is the establishment of an arbitrary domestic wage baseline (i.e. define a min wage by gov decree) in order to secure the needed mechanism for tracking productivity gains in a true cost of production and industry sector size adjustements. This definition of money puts it at the very heart of economics, and at the same time pulls the rug out of 200 years of flawed economic thinking which has always endorsed free trade as a result. Libertarian think tanks, stuck in mainstream models of barter, are unable to make the critical distinction between free domestic and free international markets because they build on barter. Barter is exchange and has no link to a nation’s domestic wages. They view wages as an international phenomenon, not a domestic one. Yet, Keynes (who in my view fumbled w his focus on investment) came very close to hitting the nail on the head when he observed wages are the result of a relative comparison process. The key point here, yet to be recognized, is that Keynes’ observation pins wages down as a domestic phenomenon, not international. This is a huge point. The American carpenter compares his wages to another American carpenter, not to carpenters in foreign countries. See rescuingeconomics.wordpress.com for the rest of the story.

  5. Dan DiFabio says:

    The Heritage Foundation and the Cato Institute were two driving forces behind NAFTA during the 1990s as the readers of this site are aware.Both organizations are funded by multi-national corporations. When think tanks are corrupted by corporate money,bad ideas will be championed as good ideas.

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