The New Job And Trade Numbers Are Related

by: Howard Richman

President Obama claims to be a champion of U.S. manufacturing workers. In his campaign advertising, he accuses Romney (falsely) of outsourcing jobs when he was CEO of Bain Capital. In his stump speech, he claims to be the champion of "made in the USA." But the latest economic reports from the U.S. Labor and Commerce Departments tell a different story:

  • On September 5, the Labor Department reported that 15,000 manufacturing jobs were lost in August, while only 96,000 jobs overall were created. If not for the extraordinary number of discouraged workers leaving the labor force, the unemployment rate would have risen.
  • On September 11, the Commerce Department reported that U.S. exports declined by $1.9 billion in July. If not for the weakening of U.S. imports, the U.S. trade deficit would have skyrocketed.

The relationship between unemployment rates and trade balance was first observed by John Maynard Keynes. In a chapter toward the end of his 1936 book, The General Theory of Employment, Interest and Money, he discussed the danger of tolerating mercantilism, the trade strategy designed to produce trade surpluses. Keynes wrote:

[A] favorable [trade] balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)

Of the overall U.S. trade deficit of $42 billion in July, about 2/3 ($28 billion) could be attributed to China. The following graph shows that our merchandise trade deficit (negative net exports) reached a record $310 billion for the twelve months ending in July:

The Chinese government keeps out American products through high tariffs and through government fiat. For example:

  • Vehicles. When a few American luxury cars started getting through China's already high protective tariffs, the Chinese government raised them from 25% to as high as 47%.

  • Movies, software, and music. The Chinese government permits the piracy of American intellectual property while delaying the import of legitimate products.

  • Meat. The Chinese government lets in U.S. grain but not meat.

  • Manufactures. The Chinese government uses subsidies to state owned enterprises to keep its people from buying U.S. products.

Instead of demanding reciprocity from China (we will buy your products only if you buy ours), as Obama could under WTO rules, his administration dispatched Secretary of State Hillary Clinton to China to beg the Chinese government for loans. The Taipei Times reported on February 23, 2009: "In Beijing, [Clinton] called on Chinese authorities to continue buying U.S. Treasuries, saying it would help jump-start the U.S. economy and stimulate imports of Chinese goods."

In a recent study of recent worldwide economic statistics for all countries with GDPs of at least $100 billion, my son, father and I substantiated Keynes claim for a strong relationship between unemployment and trade balance. We found that a country with the U.S. budget deficit and debt levels, but no trade deficit, should have an unemployment rate about 2% lower. We also found that government deficit spending has much less effect upon unemployment in trade deficit countries than in trade surplus countries.

In his acceptance speech, Republican presidential candidate said:

We will make trade work for America by forging new trade agreements. And when nations cheat in trade, there will be unmistakable consequences.

We don't yet know whether a President Romney would be able to move U.S. trade with China toward balance. We do know that President Obama has failed to do so.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.