Friday, March 6, 2015

The Impact of Trade with Japan on U.S. Employment

Governments always like to have us believe that trade deals are good for the economy.  From research done by Robert E. Scott at the Economic Policy Institute (EPI), we can quite clearly see that this is most definitely not the case for nearly 900,000 American workers.

As shown on this table, Japan is one of America's largest trading partners:

In 2013, imports from Japan made up 6.1 percent of all imports into the United States and exports to Japan made up 4.1 percent of all goods and services exported from the United States.  The top five imports from Japan were vehicles, machinery, electrical machinery, optic and medical instruments and aircraft.  The top five exports to Japan were optic and medical instruments, aircraft, machinery, electrical machinery and meat (pork and beef).

In 2012, the United States goods trade deficit with Japan was $76.3 billion, up $13.1 billion from 2011.  The goods trade deficit rose to $78.3 billion in 2013, reducing the U.S. GDP by $125.3 billion or 0.75 percent.     

Some of the trade problems which have impeded trade with Japan include:

1.) Automotive: A wide variety of barriers have impeded access to Japan's automotive market which has kept the sales of U.S. made vehicles and automotive parts at low levels.  

2.) Medical Devices and Pharmaceuticals: While Japan is one of the most important markets for U.S. medical devices and pharmaceutical exports, U.S. made products have frequently been adopted by other nations long before they are available in Japan (device lag).  As well, some American medical devices and pharmaceuticals are not available at all (device gap).

3.) Nutritional Supplements: Japan places burdensome restrictions on the health claims made by nutritional supplement manufacturers, creating market barriers.

4.) Access to Japanese Ports:  The U.S. government has longstanding concerns about the barriers to and lack of competitiveness in Japanese ports which have limited the ability of foreign shipping companies to use Japanese ports.

One of the biggest issues that has led to a growing trade deficit with Japan has been Japan's use of currency manipulation to control the value of the yen.  Japan is the world's second largest currency manipulator behind China.  By purchasing and holding assets denominated in foreign currencies, the Bank of Japan and the Government Pension Investment Fund (GPIF), Japan is able to adjust the value of the yen to suit Japan's macroeconomic goals.  Between 2000 and November 2014, Japan's holdings of foreign reserves nearly quadrupled, rising from $347 billion to $1.208 trillion.  The GPIF recently announced that it would increase its holdings of foreign stocks and bonds from 23 percent of its total of $1.2 trillion in 2013 to 40 percent in the near future.  When, through these actions, Japan keeps the value of the yen to dollar exchange rate at low levels, it makes Japanese goods cheaper for its trading partners and makes goods imported into Japan from its trading partners more expensive, making it cheaper for Japan's domestic consumers to "buy local".   It is important to note that this is far different than using monetary policies like quantitative easing to impact a nation's domestic economy since these monetary mechanisms use local currencies.

Here is a figure showing how Japan's foreign exchange reserves and foreign assets have grown since 2000:

As a share of GDP, Japan's total foreign assets rose from 7.6 percent in 2000 to 35.4 percent in 2014.    

Here is a chart showing what has happened to the yen to dollar exchange rate over the past five years:

In late 2011, it took around 77 yen to buy one U.S. dollar.  Today, it takes just under 120 yen to buy one U.S. dollar.  That makes goods (and services) imported from the United States far more expensive for Japanese consumers. 

According to the research by EPI, the manipulation of Japan's currency displaced 896,600 American jobs in 2013, with job losses in every state.  Here is a map showing the impact on the percentage of jobs displaced by the U.S. trade deficit with Japan on a state-by-state level:

The biggest impact has been on states located in the (former) industrial heartland of the United States.  Job losses were greatest in Michigan where the 56,200 jobs lost constituted 1.34 percent of the state's total employment.  The next most negatively impacted states were Ohio (loss of 50,900 jobs), Illinois (loss of 45,500 jobs) and Indiana (loss of 33,700 jobs).

The jobs eliminated included 148,400 direct jobs in commodity and manufacturing industries that competed with imports from Japan.  It also included an addition 412,000 indirect jobs in industries that would supply the aforementioned commodity and manufacturing industries and an additional 336,200 "respending jobs", jobs that would have been supported by the wages of workers that were displaced by trade with Japan.

Total job losses (direct, indirect and respending) include 446,000 manufacturing jobs with the greatest losses in the motor vehicles and parts industries losing 118,800 jobs.  Machinery manufacturing saw the loss of 96,600 jobs, fabricated metal parts manufacturing lost 80,800 jobs and computers and electronics manufacturing lost 66,100 jobs.

The impact of the U.S. - Japan trade deficit goes beyond the loss of jobs.  According to the author, the deficit resulted in reduced tax revenues and increased social safety net expenditures in 2013, which increased the federal budget deficit by $46.4 billion.  It also reduced net state and local resources by $17.5 billion in 2013. 

The Obama Administration is currently negotiating an expansion of its trading partnerships through the Trans-Pacific Partnership (TPP) with nations bordering the Pacific Ocean, including Canada, Japan, Mexico, Chile, Malaysia, Australia, New Zealand, Peru, Singapore, Brunei Darussalam and the United States.  The nine nations are attempting to negotiate a "landmark, 21st-century trade agreement" that will set "a new standard from global trade and incorporate next-generation issues that will boost the competitiveness of the TPP countries in the global economy."  Through the implementation of the TPP, the participating nations will "create jobs, raise living standards, improve welfare and promote sustainable growth". 

Here is a screen capture of the headline page for the TPP from the website for the Office of the United States Trade Representative:

As is typical of trade deal promotions, there are only glowing statements about what the deal will accomplish and no mention of the potential downside.  What should be of concern is the growing trade deficit from the nations in the TPP; the trade deficit with the nations involved in the negotiations grew from $110.3 billion in 1997 to $261.7 billion in 2014.

Japan's persistent currency manipulation and its impact on trade with the United States should serve as a warning to the negotiators of the Trans-Pacific Partnership.  The agreement should include binding resolutions that prohibit currency manipulation by all nations; without such agreement, the United States could be locked into another trade agreement that proves to be detrimental to American workers.

1 comment:

  1. Very informative, it should also be noted that America supports Japan with billions of dollars in defense or protecting the small island country. In many ways we are carrying the weight of Japan on our back.
    Still Japan is haunted by massive debt that will soon bring it to its knee's and the yen has started a fall that is unlikely to stop. A loop is developing that will feed on itself. As the yen falls and people in Japan realize that it is liable to continue, more and more people will want to put their money abroad, at that point the yens fall may become unstoppable.
    The financial news flowing from Japan has become so loaded with conflicts of interest and internal deals created to prop up one weak institution with another that it would be called comical it the ramifications were not so serious. The article below explores how the sun will soon set over the land of the rising sun.