It is often claimed that a large trade deficit leads to a net loss in U.S. jobs. In reality, the latest economic data shows that the issue is more complicated than that. The US-China trade deficit has contracted under the effects of diminished trade due to the coronavirus outbreak, yet contrary to the pro-tariff arguments, employment did not blossom.
Last week the Department of Commerce announced that the total U.S. trade deficit had fallen by 12.52 percent from January to February, reaching a three-and-a-half year low. This is unsurprising as the global economy contracted under duress from the pandemic. The trade deficit with China decreased by 17 percent from January 2020 to $19.7 billion in February 2020, falling even farther than the broader U.S. trade deficit. Exports to China decreased $0.3 billion and imports decreased $4.2 billion.
A report released in January 2020 by the Economic Policy Institute (EPI) claims the China trade deficit has led to the loss of 3.7 million American jobs since 2001, including 1.7 million jobs lost since 2008’s Great Recession. Yet the current situation suggests that trade deficits have little to do with the overall level of employment in the American economy. Unemployment has exploded while the trade gap has shrunk.
Reducing the trade deficit is not a free ticket to employment. The Congressional Research Service notes that when the economy has contracted, as in 2009, the trade deficit fell, and unemployment rose, while in 2006 the trade deficit rose, and unemployment was at a low of 4 percent. Citing the trade deficit as an argument against free trade is a tired tactic that does not account for the full benefits of free trade.
The U.S. just so happens to import more goods from China than we export; however, this fails to capture capital investment and other metrics critical to the continued growth and enrichment of the American economy. The reduction in the U.S. trade deficit because of the pandemic is just the most recent evidence that shrinking trade deficits don’t automatically lead to gains in U.S. employment.
As we recover from the health crisis and reboot the economy after the shutdown, the United States should pursue policies designed to remove burdensome tariffs that hurt consumers and small businesses, while expanding access to markets as supply chains are stretched to their limits.
Slowing global trade may shrink the trade deficit, but this contraction will not produce a fountain of jobs. Allowing consumers and producers to engage in trade as friction-free as possible is a step forward towards economic recovery and growth, even though the stronger U.S. economy may well generate a bigger trade deficit. Free trade will allow the American economy to develop further beyond the current crisis.