Urban Wire Does trade cause job losses?
Stephen Rose
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Media Name: shoes02.jpg

Most Democrats in the House of Representatives opposed the Trade Promotion Authority act because they think that international trade has been bad for American workers. Part of their opposition is based on the prevalence of the “Made in X” label, where X is often China or another low-wage country. The mass media perpetuates this notion by creating “challenges” to buy only American-made products for Christmas or for furnishing a house, saying that it is doable but very difficult.

But this is a myopic way of looking at international trade because consumers, who mainly only interact with retailers, have a narrow view of the economy. Behind the final sales are a long chain of activities embedded in the cost of the goods and services.          

Consider the process of producing making shoes. Virtually all the materials, manufacturing, and packaging of these items come from foreign sources, but only 50 percent of the final price goes to imports. The American half of the cost of shoes goes to transportation to market, retail mark-up, advertisers, insurers, bankers, and renting space. LeBron James and even the camera operators that film the ad are part of this process because their costs are included in the final price of Nike shoes.

Shoes are the single most import-intensive product. About 45 percent of the final price of clothing and new cars goes abroad. And all those stories about no American-made toys or furniture miss the fact that the American component in the final price of these items is 73 and 78 percent respectively.

Many toy and furniture workers lost their jobs because of the great jump in imported products in these areas. And many of the communities in which these workers are concentrated were hard hit by the loss of this employment. But the 16.5 percent of GDP that imports represent is mostly offset by the 13.5 percent of GDP that goes for exports.

The common sense view is that this 3 percent trade deficit leads to an equivalent share of the labor force not having jobs that they otherwise would have. Most economists, however, think the trade effect is minor. In particular, as the accompanying figure shows, they look at the unemployment rate and the deficit as a share of GDP and don’t see any correlation between deficits rising and unemployment rates rising. For example, in both the 1980s and the 1990s, the trade deficit was rising and the unemployment rate was falling. 

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The problem with the trade debate is that both sides overstate the effects of trade. The opponents of trade point to the many products assembled abroad as evidence that a substantial portion of the workforce is at risk of being outsourced. The proponents cite the large number of export jobs to argue that trade is a net job gainer for Americans. By contrast, the real benefits of trade are that it makes the world economy more efficient, which leads to lower prices in highly industrialized countries like the United States. By one estimate from a group of Harvard researchers, the positive benefit of trade could be as high as $1 trillion a year.

Consequently, the benefits are substantial but diffuse, while the costs to displaced workers and their communities are large and clear. Theoretically, this can be solved by having those who benefit from trade subsidize those who lose. While this is the logic of the Trade Promotion Authority act, the size of the benefits to the displaced workers has not been enough to re-train these workers so that they can get comparable jobs. Hence, those who potentially face displacement oppose expanding trade, and the labor and progressive movements in this country have successfully pressured congressional Democrats—and presidential candidate Hillary Clinton—to oppose the trade act, even though the number of workers who will be affected is relatively small. 

Research Areas Economic mobility and inequality
Tags Technology, trade, and automation
Policy Centers Income and Benefits Policy Center