All Commentary
Tuesday, August 7, 2018

When Trade “Deficits” Go Up, So Does US Employment

The data are clear: increases in the US trade deficit is strongly correlated with increases in US employment numbers.

The chart below shows graphically the close relationship over time between annual US civilian employment and US trade deficits (inverted) from 1972 to 2017. A starting date of 1972 was selected because it marked the early part of the period when the US first started running persistent and increasingly large trade deficits for goods and services. Despite the false narrative of rising trade deficits leading to US job losses, the exact opposite has been true for nearly the last half-century as the chart shows: Rising trade deficits over time have been closely associated with increased levels of employment in the U.S.

The chart was inspired by Don Boudreaux’s blog post on Cafe Hayek “Morici is Simply Mistaken“:

Mr. McKinney:

I’m unsure why you think that an op-ed by Peter Morici will cause me to question my commitment to a policy of unilateral free trade. Prof. Morici consistently reveals his poor understanding of the economics of trade, and the essay of his that you sent today is par for his course.

Consider, for example, Morici’s call for “a managed trade arrangement [with China] that rebalances bilateral commerce.” I’m sorry, but this statement is beyond silly. To believe that in a world of nearly 200 countries—and especially when one of the country’s currency serves as the global reserve currency and when cross-country investments are routine—each pair of countries should have exports to the other equal in value to imports from the other is sure evidence of deep economic ignorance.

Consider also Morici’s incessant assertion that U.S. trade deficits with the rest of the world reduce overall employment in the U.S. This assertion, too, is wildly mistaken—largely, but not only, because Morici ignores the fact that a U.S. trade (or, more precisely, current-account) deficit is matched dollar-for-dollar by a U.S. capital-account surplus (meaning that the dollars in the U.S. current-account deficit return to the U.S. as dollars invested here).

But I tire of repeating the theoretical reasons why Morici’s assertion is mistaken. So I instead offer some empirical evidence. In the graph above (updated) the dark blue line is annual civilian employment from 1972 to 2017 and the light blue line is the annual U.S. trade deficit over those same years. As is plainly seen, there is in these data no evidence whatsoever that U.S. trade deficits reduce overall U.S. employment.

In fact, the evidence displayed in the chart above shows that increases in the US trade deficit are associated with rising, not falling, employment levels in the US. The statistical relationship between US jobs and US trade deficits, measured by the correlation coefficient between those variables, is remarkably high at 0.825. Therefore, US employment and U.S. trade deficits are highly and positively correlated over time.

Here’s just one example of Morici’s incessant and mistaken assertions about a supposed negative relationship between trade deficits and jobs.

Of all the economic policies President Trump has marked for attention this year—merit-based immigration, infrastructure and vocational training—fixing the trade deficit offers the biggest bang for the buck. Cutting the $620 billion annual trade gap in half could create 2 million jobs.

Well, Mr. Morici, consider these facts: 1) Between 1997 and 2003, the US trade deficit increased by a factor of 5X from roughly $100 billion to $500 billion during a period when US employment increased by more than 8 million and by more than 6%. Between 2003 and 2008, the US trade deficit increased by nearly 44% and by $220 billion, while the US added 7.6 million jobs. And between 2009 and 2017, US employment increased by more than 13 million in the post-recession recovery while the trade deficit increased by $182 billion and by 46%.

Reprinted from the American Enterprise Institute.

  • Mark J. Perry is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus.