Bad news on jobs. Don't blame trade.

Two pieces of economic data from the end of last year have made headlines.

The first, announced by the Bureau of Labor Statistics, on January 9, was that the unemployment rate rose in December from 6.8 to 7.2 percent—obviously bad news. The second item, released by the US Census Bureau, on January 13, was that the US trade deficit declined from $56.7 billion in October 2008 to $40.4 billion in November 2008, a fall of nearly 30 percent. Based on available data, it appears that the trade deficit for 2008 will total around $670 billion, down from $700 billion in 2007 and $753 billion in 2006. About 80 percent of the decline reflects the falling price and volume of oil imports. However, nonoil merchandise exports in 2008 fell about as much as nonoil imports, about 7 percent for both.

The smaller trade deficit sounds like good news, and indeed lower oil prices provide a modest but welcome cushion for the hard landing inflicted by our financial crisis. The declining value of US imports means that US consumers are buying fewer goods from abroad. Less money spent on oil from the Middle East, toys from China, BlackBerries from Canada, and socks from Costa Rica leaves more money to be spent on US goods and services.

But the story has other chapters. In times of economic anxiety, imports may be a convenient scapegoat, but they are the wrong target. A Fortune Magazine poll, taken before the financial meltdown, reported that 63 percent of respondents believe that international trade has "made things worse" for the United States, and a remarkable 28 percent blamed the economic slowdown on "U.S. companies sending jobs to countries where labor is cheaper" (tying with high energy prices as the lead explanation). Mistrust of international trade obviously runs deep. Should the Commerce Department throw a party to celebrate declining imports?  

No! The numbers just don't bear out the common association between larger trade deficits and rising unemployment. In fact, the almost simultaneous announcement of 7.2 percent unemployment and the lowest monthly trade deficit since 2003 reflect a plain fact: Bad economic times drive down both employment and imports. Figure 1 plots the US goods and services trade deficit, from January 2000 to November 2008, against the level of nonfarm employment (seasonally adjusted). Employment declined in 2001 and 2002, and then started to grow in late 2003 and early 2004—just as the trade deficit was worsening. The trade deficit began to taper off in late 2006, and employment began to decline in late 2007. Trade deficits and employment typically move together, not in opposite directions.

Figure 1 Sources: US Census Bureau and Bureau of Labor Statistics

To be sure, manufacturing jobs have been in secular decline for years (figure 2), but analysis of month-to-month changes shows that rising worker productivity, not rising trade deficits, is the principal explanation.¹. Meanwhile, as the American economy increasingly becomes a service-oriented workplace, service jobs are steadily rising, and growing by some 8 percent since 2000.

Figure 2 Sources: US Census Bureau and Bureau of Labor Statistics

For those worried about jobs, imports are the wrong place to focus policy. In fact, this sort of thinking is dangerous because it sparks protectionist impulses. When the United States imports less, countries that depend on selling to the United States will suffer. In turn, their firms and households are less able to buy US goods and services. The place to focus policy is on growing exports, not shrinking imports. US tax and credit policy, coupled with export controls and market barriers abroad, are all ripe for attention if the US government will put its mind to export expansion.

The Financial Times and the Wall Street Journal both report that international trade is falling. The World Bank predicts that world trade will contact in 2009 for the first time since the 1982 recession. This outlook should prompt officials to devise creative programs for expanding exports and put a close watch on measures that would add import protection to the recessionary gale blowing across the globe.  

Studies at the Peterson Institute for International Economics show that global engagement has increased US income by roughly $10,000 per household. The double whammy of shrinking jobs and shrinking trade should prompt the Obama administration to sit up, take notice, and act.

Notes

1 Hufbauer, Wong, and Sheth, 2006, US-China Trade Disputes: Rising Tide, Rising States, Washington: Institute for International Economics, Appendix A.