Trade Deficits Produce Different Jobs - Assignment Example

Running header: Trade Deficits Produce Different Jobs Student’s Name: Name of Institution: Instructor’s Name: Course Code: Date of Submission: Introduction Trade deficit refers to a country’s economic measure of a negative trade balance that results when the imports exceed exports. This way, trade deficit results in a domestic currency outflow to foreign markets (Douglas, 2003). For example, US’s trade deficit has been growing for the past ten years. As a result, large amounts of the US dollar are in foreign countries. Already, some economists are worried about it, especially with the realization that these US dollars in foreign countries may sell any time, and this potential increase in the sale of dollars may drive its value down, making it even harder for the US to buy imports (Shelburne, 1996). However, this is apparently part of the problem. A 2011 Economic Policy Institute paper (Scott, 2010) concluded that the widening US trade deficit with China is responsible for the loss of 2.8 million jobs, -1.9 million of which are in manufacturing- between 2001 when China entered the World Trade Organization (WTO) in 2010. The paper noted that the deficit has grown from $84 billion to $278 billion within that period. The paper attributed the trade deficit on China’s manipulation of its yuan, maintaining its value on the low to encourage huge bilateral surplus with the US; failed expectations that China’s demand for US good would grow; and unlawful policies and regulations, among others. According to the paper, $1 billion dollars worth of China-bound exports are meant to support American jobs. On a sort-of detour, $1 billion of imports brought in from China displaces US employees who could work making these products. Balanced trade therefore means that net job effect. Unfortunately, this trade deficit is hurting the US economy in an arguably unfair bilateral trade. Many economists have made the same argument. Most economists believe that the perpetually growing US trade deficit pose a great threat to Americans. They attribute job losses in the US to the trade deficit (Duff, 2008). Running for the 1996 republican presidential nomination, Buchanan (2006) presented his own estimate of the number of jobs lost as a result of the trade gap. He wrote that a $1 billion dollars worth of trade gap caused the loss of 20, 000 jobs. He further agued that a trade balance would thus provide 3.5 million manufacture jobs. And Scott (2001) argues that when the US imports a certain number of cars rather than build them at home, then the same number of workers in the US who would have been employed to build them lose jobs. To affirm these arguments, many economists had predicted that the wider trade deficit caused by the financial meltdown in East Asia would cost the US over a million jobs. These economists have been proposing that in order to hold this ‘threat’, the government needs to implement a number of policies that will curtail the expanding trade imbalances between the US and China, as well as the rest of the world. However, I also noted that most of them expressed the thought that the US cannot create jobs now unless the deficit is taken care of. I find this latter argument different from the claim that the deficit has resulted in job loss. The assumption here is that this latter group does not exactly believe that the deficit is directly responsible for the reduction in employment. They simply recognize the role that reducing the deficit could take in restoring the employment rate in the country. Of course, this assumption may be wrong. Nonetheless, the purpose of this paper is to show that trade deficits do not really lead to fall in employment. Instead, trade deficits shifts jobs from certain sectors by creating new economic necessities and as a result, opportunities. To do this, this paper will look at deficit trends in US’s history vis-à-vis employment. Discussion The US has faced a persistent Merchandise Trade Deficit since the 1960s. And that deficit has been fluctuating, especially in the earlier years (Roberts, 2006). Otherwise, the deficit has been growing. Merchandise trade balance basically refers to what one gets by subtracting imports from exports. The table below follows the trend of US trade deficit every two years from 1960 to 2004. Table 1 Adapted from: Roberts (2006) Explanation: From 1960 to 1976, the deficit was small. Sometimes it was negative, others positive, but largely low. But since 1976, the US has been running a deficit each year. Between 1976 and 2004, the US had imported more than exported by $6 Trillion (Roberts, 2006). Despite this, that run of deficits has largely had no or little impact on jobs, or employment. The table below shows the trend of employment from 1939 and 2005. Table 2 Adapted from: Roberts (2006) Explanation: From this table, one does not make out any obvious impact of the trade deficits on employment. Despite persistent trade deficit growth since 1976, there were 40 million more jobs in 2005 than when it all began (BLS). Infact, employment rate seems to grow fairly steadily except in the years that coincide with economic recessions. For instance, 1991/93 fall in employment coincides with a recession in that period. Trade can only affect job types in the economy, not their numbers. Generally, economy only produces jobs for a population that needs them (Roberts, 2006; Marko, 2005). Although the population became higher after 1976, the proportion of the working population also rose after 1976 than the years before (BLS,). One of the job classes that have suffered most in the recent years are the manufacturing jobs. It is therefore no wonder that they have become a famous scapegoat for explaining the effects of trade deficits on employment. The table below shows the manufacturing employment trends between 1939 and 2005. Table 3 Adapted from: Roberts (2006) Explanation: Again, there is no clear difference between the years before and those after 1976. But there are times when manufacturing employment clearly fell. These years coincided with years of war: WWII, Korean War and Vietnam War. It can however be seen that between 1965 and 2006, there was a relatively steady fluctuation of manufacturing jobs: about 16 million to 20 million jobs. But when the manufacturing jobs are weighed against the proportion of labor force, it is seen that since 1976, manufacturing jobs have been falling steadily. Table 4 Adapted from: Roberts (2006) Explanation: But this is not a cue for celebration for those who argue that trade deficits cut down manufacturing jobs. This fall did not begin with the rise in trade deficits in 1976. It actually began in 1944 (Roberts, 2006), when it was at the peak. Since then it has been on the decline, even before rise of globalization. There is an explanation. Contrary to the currently popular argument that the US’ economy has lost its grip, the manufacturing sector, I believe it is stronger. Although it has fallen with the recession, it can steady itself over time as it has always done. The real GDP shows that the economy has grown 4.5 times since 1959. In the same period, manufacturing output has grown even bigger by 0.2 times more. In other words, even with fewer workers in the manufacturing sector, production has risen 4.7-fold (BLS). This increased productivity is attributable to the fact that the fewer workers are more educated and they work with more sophisticated tools and machinery. And this is the main cause for the decline in manufacturing employment. Having said that, now the question is: do trade surpluses- in comparison to trade deficits- create jobs? Grisworld (1998) thinks that such arguments would only bear meaning if there were proof of falling manufacturing employment corresponding with rise of trade deficit. On the contrary, ‘in all the recent 14 years but two, during which trade deficit has grown larger, the rate of unemployment has fallen steadily’ (Council of Economic Advisers, 1998). Besides, there is hardly a clear-cut proof that eliminating the trade gap can create more manufacturing jobs. Accordingly, the tables below (5, 6 and 7) show the trend of Agricultural trade balances vis-à-vis employment Table 5 Table 6 Adapted from: Roberts (2006) Explanation: Since 1963, the US has exported more food than it has imported. That is to say that it has had more food surpluses every year in that time. To say that trade deficits cause loss of jobs, is equally to say that surpluses create jobs. But it should be noted that by 2006, the number of agricultural-sector workers had fallen by less than half the number in 1963; this despite the rise of population and participation in labor force that has seen overall labor force double (Roberts, 2006). Productivity is the answer to the two related trends. It is the reason for the decline in the significance of agriculture as an employment source, as well as the reduction of manufacturing employment. The answer is simple and clear: deficits do not eliminate jobs as much as surpluses do not create them. Table 7 Adapted from: Roberts (2006) The argument supporting the claim that trade deficits eliminate jobs is basically based on the assumption that exports create employment and imports kill jobs. And so, if imports are more than exports, the expected outcome is net job destruction (Douglas, 2003). The main failure of this argument is that it ignores the job market’s dynamism. Trade deficits do not lead to job loss in the same balanced numbers. Instead, they offset new economic opportunities in the specific countries which can counter the deficits in other sectors. This simple logic can be seen in what has happened in the agriculture sector over the last century. Since farmers have grown innovative, people can now get more food at relatively lower prices by using fewer workers. That does not create poverty but wealth. The number of American workforce in the agricultural sector had fallen to 2 percent in 2006, as compared to 40 percent in 1900 (BLS). However, new jobs have risen along the way to replace the ones lost in agriculture. And these jobs now pay higher, relative to the simple fact that people do not pay as much for food as they used to. The dynamism of job market has been reflected here. While imports have, in the past 50 years, surged, trade deficit has risen for about 35 years now. Yet employment has continued to grow steadily. If the US banned imports, it would surely kill trade deficits. However, job numbers would not change (Douglas, 2003). Instead, the people would have to make all the products that they have been importing. The industries affected would grow, but others would shrink as there would not be sufficient workers for all industries. Trade allows cooperation, which allows others to create those goods and services that a country may surely make on its own, but at a greater cost. Conclusion In conclusion, this paper aims to explain hoe all the aspects explained above relate to Trade Deficit. Table 7 below shows the trend of capital account balance between 1960 and 2005. Capital account balance fairly reflects the trend of the Merchandise Trade Balance. It stays low- zero at times- for long before the surpluses start growing persistently. This reflects the beauty of dollar-dominated assets as a form of value-store. Contrary to the implication of most arguments against trade deficits, a trade deficit is not the same as debt; or rather how much a country owes other countries. Capital account surplus makes it possible for a country to ‘eat’ more than it ‘makes’, which it the definition of trade deficit. As Grisworld (1998) puts it, economic theory makes it clear that a trade deficit does not necessarily mean a bad situation as it normally corrects itself over a period of time. Table 7 Adapted from: Roberts (2006) Both the capital account surplus and trade deficit are determined by a number pf factors simultaneously, and not one causes the other. As long as a country, the US for instance, remains a conducive and attractive investment spot to other countries, trade surplus and deficit are sustainable. References Buchanan, P.J. (2006). The Great Betrayal: How American Sovereignty and Social Justice Are Being Sacrificed to the Gods of the Global Economy. New York: Little Brown Council of Economic Advisers. (1998). Economic Report of the President, February 1998. Washington: Council of Economic Advisers. Duff, C. (1998), "U.S. Trade Gap Grew 24% in December: Deficit Could Worsen in '98 As Asia's Ills Spill Over, Some Analysts Warn," Wall Street Journal, February 20, 1998. Douglas, A. (2003). Free Trade under Fire: The employment rationale for trade protection. Princeton, NJ: Princeton University Press Grisworld, D. (1998). America's Maligned and Misunderstood Trade Deficit. Trade Policy Analysis, No. 2, p. 67-89. Grisworld, D. (2006). Trade Deficits Don’t Mean Lost Jobs. Cato Institute, viewed 15 March, 2012 from, http://www.cato.org/publications/commentary/trade-deficits-dont-mean-lost-jobs, Marko, A. (2005). United States Trade Deficit: Myth vs Reality. Viewed 15 March, 2012, http://www.freerepublic.com/focus/f-news/1312462/posts Roberts, R. (2006). Does the Trade Deficit Destroy American Jobs? George Mason University, November 2006, viewed 14 March 2012, http://www.invisibleheart.com/Iheart/TradeDeficitJobs.pdf Scott, R.E. (2001). "Fast Track to Lost Jobs: Trade Deficits and Manufacturing Decline are the Legacies of NAFTA and the WTO," Briefing Paper, Economic Policy Institute, October 2001, p. 2. Scott, R.E. (2010). Growing U.S. Trade Deficit With China Cost 2.8 Million Jobs Between 2001 and 2010, Economic Policy Instute, September 20, viewed 14 March, 2012, Shelburne, R.C. (1996). "The Macroeconomics of Commercial Policy and the Trade Balance: A Policy Perspective," International Trade Journal, Vol.10, No. 1 (Spring 1996): 81. Read More