Cato on China trade: Looking glass economics

My research has shown that the growth of the U.S.-China Trade deficit since 2001 has displaced or eliminated 2.8 million American jobs, and that eliminating currency manipulation by five countries in Asia (including China) could create up to 2.25 million U.S. jobs in the next 18-to-24 months. Dan Ikenson of the Cato Institute has responded with a graph which appears to show “a positive relationship” between “the bilateral trade deficit and jobs… when the deficit increases, U.S. employment rises; when the deficit shrinks, U.S. employment declines.” If Ikenson is right, there’s a simple policy solution: just eliminate exports!

Increasing exports reduces the trade deficit. In Ikenson’s world, this shrinks employment.  In Ikenson’s model, eliminating exports increases the trade deficit and creates jobs. If he’s right, we should eliminate all exports, which totaled about $1.8 trillion last year. That will provide a HUGE boost to employment and the economy.

President Obama and all the business executives on his export council, such as Boeing Chair W. James McNerney, must be wrong if Ikenson is right. Exports are really the problem, and the president’s campaign to double exports will only make our terrible unemployment problems worse.

Last Wednesday, Senator Orrin Hatch used a graph very similar to the one developed by Mr. Ikenson to criticize my estimate that China trade has displaced 2.8 million jobs. The senator’s chart compares only U.S. imports and employment—he was careful to avoid bringing exports into the discussion. But his chart otherwise echo’s Ikenson’s work.

The basic problem with both charts it that they ignore basic economics and simple rules of national income accounting. In the national income accounts, exports contribute to Gross Domestic Product (and employment); imports reduce GDP and employment. Every quarter, the Bureau of Economic Analysis in the U.S. Department of Commerce publishes GDP statistics based on these national income accounts, and they have been a foundation of macroeconomics for generations. Economists from EPI and many other leading institutions, including the Federal Reserve bank of New York, have estimated the job impacts of trade in recent years by netting the job opportunities lost to imports against those gained through exports. But in the world of Senator Hatch and Mr. Ikenson, increasing imports are good for employment and exports are bad: what’s down is up and up is down. It’s economics Through the Looking Glass:

Alice laughed. “There’s no use trying,” she said: “one can’t believe impossible things.”

“I daresay you haven’t had much practice,” said the Queen. “When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.”

(Lewis Carroll, Through the Looking Glass, Chapter 5).


  • Anonymous

    Cato Institute’s charts and studies have so little relationship with observable reality, one wonders if these free tradetors just make them up on the fly. Forty years ago virtually all consumer products, including televisions, stereos, small appliances, cameras, apparel, tools just to name a few, were made by our fellow Americans. I know this was so because I was there. Now, hardly any consumer products are made here.

    The free tradetor mantra is “the consumer benefits!”, that is until the consumer’s job is exported or they have to compete for fewer jobs offering lower wages with workers who jobs were exported. The real beneficiaries are the filthy rich who have become even richer by reaping the spoils from their exploitation of foreign workers, who are paid so little, they might as well be slaves.