To start, it’s not inherently a problem for a country to have a trade deficit. For example, a fast-growing economy pulls in more imports as it expands, which pushes a country’s international trade account toward deficit. In that context a trade deficit is good for the economy, allowing the country to consume and invest more than if it maintained balanced trade. This was the story in 2000 when, after four years of strong growth, the American economy had an unemployment rate of 4 percent and a trade deficit that amounted to 3.7 percent of GDP.
But that story ended after the recession in 2001. The economy didn’t get back the jobs it lost in 2001 until January of 2005—then the slowest employment recovery since the Great Depression (it’s since been outdone in slowness by the recovery following the Great Recession). The trade deficit during this period continued to rise—the dollar was then over-valued, making U.S. goods less competitive internationally—eventually peaking at almost 6 percent of GDP in 2005 and 2006. In the early aughts, then, the growing deficit was not associated with a strong economy but a weak one.
In this context, the trade deficit was subtracting from demand in the domestic economy. Spending that could have employed people who needed jobs in the U.S. was instead employing people in Germany, China, and other countries from which America imports goods and services. In principle, the U.S. government could have looked to spur other channels of demand to offset the trade deficit, but as a practical matter this is often not easy to do: The most straightforward way to generate demand is through additional government spending, but there are major political obstacles to running large budget deficits even at times when it would be beneficial to the economy.
This problem became much worse as the economy faced a prolonged period of what economists call secular stagnation—meaning weak growth outside of a recession—in the years following the collapse of the housing bubble. While the U.S.’s trade deficit fell from its pre-recession peak, it has remained near 3 percent of GDP in the post-crash years. This deficit is a serious drain on demand, and does not stem from a strong economy pushing its limits. And with the Federal Reserve Board pushing interest rates down to zero, it had limited capacity to boost demand.
What effect does all this have on American workers? Trade deficits, even in times of strong growth, have negative, concentrated impacts on the quantity and quality of jobs in parts of the country where manufacturing employment diminishes. Even the economists who argue (incorrectly, we believe) that the trade deficit doesn’t affect the total number of jobs do admit that it affects the composition of jobs. There is, for example, a lot of research confirming that deindustrialization in the Rust Belt is partly a result of the fact that America meets its domestic demand for manufactured goods by importing more than it exports. One oft-cited academic study found that imbalanced trade with China led to the loss of more than 2 million U.S. jobs between 1991 and 2011, about half of which were in manufacturing (which worked out to 17 percent of manufacturing jobs overall during that time).* Further, the economist Josh Bivens found that in 2011 the cost of imbalanced trade with low-wage countries cost workers without college degrees 5.5 percent of their annual earnings (about $1,800). Far from a small, isolated group, these workers represent two-thirds of the American workforce.