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McKinsey Quarterly

Don't blame trade for US job losses

A new look at US trade and employment data shows why it’s wrong to believe that foreign competition accounts for weak job growth since 2000.

The US recession officially ended in late 2001, and ever since, despite recent gains, aggregate job creation has been extremely weak—weaker even than during the "jobless recovery" that followed the 1990–91 recession. Contributing most to the overall number of US jobs lost since 2000 has been the manufacturing sector, which shed 2.85 million of them from 2000 to 2003, notwithstanding the relatively mild nature of the recent downturn in the economy as a whole.

Many people in the United States have looked at the enormous US trade deficit and concluded that a flood of imported goods from China and the offshoring of services to India are to blame for the loss of US jobs. CNN's Lou Dobbs has called the problem "a clear call to our business and political leaders that our trade policies simply are not working." The issue isn't the concern solely of US policy makers: the same fears about trade are rampant throughout Europe and Japan, while protectionist sentiment is rising around the world.

But trade, particularly rising imports of goods and services, didn't destroy the vast majority of the jobs lost in the United States since 2000. We analyzed detailed trade and industry data to estimate the extent of job dislocation due to offshoring in the manufacturing and service sectors from 2000 to 2003. This work was the first complete analysis of how the economic downturn, imports, exports, and global competition interact—directly and indirectly—to affect employment.

Our research shows that, in fact, only about 314,000 jobs (11 percent of the manufacturing jobs lost) were lost as a result of trade and that falling exports, not rising imports, were responsible. Service sector offshoring destroyed even fewer jobs. These figures are tiny relative to the millions of positions lost and created every year in the United States by normal market forces.

The real causes of job losses were weak domestic demand, rapid productivity growth, and the dollar's strength, which dampened US exports. It is vital that policy makers understand the forces at work, for otherwise there will be a temptation to apply quick fixes, such as protectionism, that won't restore employment, because they do not address the underlying problems. The real solutions—stimulating domestic demand, cutting the budget deficit, and pushing countries with artificially cheap currencies to let them appreciate against the dollar—are harder to implement but more likely to boost employment.

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