Growing Trade Deficit with China has Cost 41,100 Kentucky Jobs Since 2001

Growth in the U.S. goods trade deficit with China between 2001 and 2013 eliminated or displaced 41,100 jobs in Kentucky, according to “China Trade, Outsourcing and Jobs,” a new study from the Economic Policy Institute (EPI) released today.

Among the states, Kentucky had the 17th-highest job loss from trade with China as a share of employment, according to the report. Job losses have been particularly steep in the 6th Congressional District in central Kentucky, where 11,000 jobs have been lost or displaced. That gave the district the 46th-highest job losses as a share of employment of all 436 congressional districts.

“One of Kentucky’s economic strengths is that it’s a manufacturing state, but that has made it vulnerable to unfair trade policies in recent years,” said Jason Bailey, director of the Kentucky Center for Economic Policy. “If public officials are serious about supporting manufacturing jobs in Kentucky, they must work to reduce the trade deficit by putting an end to trade practices that create an uneven playing field disadvantaging Kentucky workers.”

Of the 41,100 cumulative jobs lost or displaced in Kentucky because of the growing trade deficit with China, 31,600 are in manufacturing. Job loss has been particularly steep in computer and electronic parts manufacturing, where 10,700 jobs have been lost or displaced; apparel manufacturing, with 4,500 fewer jobs; industrial supplies including plastics and rubber products with 4,000 fewer jobs; and electrical equipment, appliances and components with 2,500 fewer jobs.

Supporters of China’s entry into the World Trade Organization in 2001 claimed that the move would create jobs and increase U.S. exports to China. However, China has continued to engage in unfair trade practices—such as currency manipulation, Illegal industry subsidies, tariff and non-tariff barriers to imports, dumping, and the suppression of wages and labor rights—that have limited the growth of U.S. exports. Meanwhile, growth in outsourcing by multinational companies has created a flood of Chinese imports into the United States, leading to rapidly growing trade deficits and corresponding job loss. U.S. trade deficits with China have nearly quadrupled since 2001, reaching $324.2 billion in 2013.

“Currency manipulation by China is the single biggest contributor to growing U.S. trade deficits and the resulting job loss,” said Robert Scott, Director of Trade and Manufacturing Policy Research at EPI and an author of the report. “It’s time for Congress and the president to enact tough new policies to end currency manipulation by China and more than a dozen other nations that have adopted similar policies. Congress should pass pending legislation that would allow the Commerce Department to penalize currency manipulators, and the president should use existing authority to tax or offset currency manipulation by foreign governments.”

The impact of the trade deficit with China is not limited to direct job losses. Competition with low-wage countries has driven down wages and reduced bargaining power for millions of workers throughout the U.S. economy.

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The full report is available here: http://www.epi.org/publication/china-trade-outsourcing-and-jobs/

Click here for KCEP’s blog on the report which includes data on Kentucky job losses: http://kypolicy.org/trade-deficit-china-cost-41100-kentucky-jobs-many-manufacturing/.

Trade Deficit with China Has Cost 41,100 Kentucky Jobs, Many in Manufacturing

Kentucky has paid heavily for the U.S.’s growing trade deficit with China—41,100 fewer jobs between 2001 and 2013 according to a new report from the Economic Policy Institute (EPI). Since China entered the World Trade Organization (WTO) in 2001, its use of currency manipulation and other policies have suppressed the relative price of Chinese goods, costing 3.2 million U. S. jobs and depressing workers’ wages.

Kentucky’s job losses from the widening trade deficit with China rank the state 17th hardest-hit in the nation, according to EPI. More than three out of every four lost or misplaced jobs were in manufacturing (31,600), with particularly steep losses in computer and electronic parts manufacturing (10,700 fewer jobs), apparel manufacturing (4,500); industrial supplies including plastics and rubber products (4,000); and electrical equipment, appliances and components (2,500). The Commonwealth’s status as a strong manufacturing state has meant it’s had more jobs to lose in competition with China (see table at end for more detail on jobs lost by industry).

In total, the state lost 53,000 manufacturing jobs between 2001 and 2013, meaning the trade deficit is responsible for about 60 percent of the decline in the state’s factory jobs over that period.

cumulative job loss trade deficit

Source: EPI analysis of U.S. Census Bureau (2013), U.S. International Trade Commission (USITC 2014), Bureau of Labor Statistics (BLS 2014b), and BLS Employment Projections program (BLS-EP 2013a and 2013b).

Geographically speaking, Kentucky’s 6th congressional district is the hardest hit, with 11,000 fewer jobs. As a share of total employment, the 6th district has experienced the 46th steepest job loss out of 436 congressional districts nationwide.

district job loss trade deficit

Currency manipulation is a big part of the problem

Proponents of China’s entry into the WTO argued that by bringing China into compliance on tariff and nontariff barriers to trade, demand for U.S. exports would grow with China’s expanding economy and middle class and create U.S. jobs. Yet while exports have grown from $18 billion in 2001 to $114 billion in 2013, imports from China have grown more quickly and from a higher base—from $102 billion in 2001 to $438 billion in 2013. The trade deficit was $324.2 billion in 2013, almost quadruple its amount in 2001.

A primary reason the trade deficit has exploded is that China does not allow its currency, the yuan, to fluctuate freely against the value of the dollar. That makes exports from China cheap and imports from other countries expensive. The Chinese government has kept its money cheap by buying foreign currencies and flooding the market with yuan—a practice called currency manipulation. As of June 30, 2014, about 70 percent of China’s nearly $4 trillion in foreign exchange reserves were in U.S. dollars. One economist estimated in 2012 that the yuan was “one-sixth of what it should be.”

In a report earlier this year, EPI estimated that ending currency manipulation over three years through penalties or offsets on imports from countries like China would reduce the trade deficit by as much as $500 billion, create up to 5.8 million jobs, and reduce the federal budget deficit by $266 billion each year.

The Chinese government also uses other legal and illegal policies to bolster its trade surplus such as direct export subsidies, nontariff barriers to imports and dumping cheap goods in foreign markets. China’s extensive suppression of labor rights drives down workers’ wages, keeping production costs low—an incentive for foreign direct investments in Chinese factories and a big cause of U.S. jobs being outsourced to China. The agreement through which China entered the WTO failed to provide any protections or improvements for workers, and it also failed to hold China to higher environmental standards, making it harder for competing economies to take better care of their workers and natural resources, as well.

The trade deficit is costing Kentucky workers’ wages, too

41,100 jobs and the associated wages are not the only casualties of the China trade deficit for Kentucky: because competition with China has driven down workers’ bargaining power, it also means less pay for low-wage workers in general. One economist measuring the effect of trade with less developed countries on American wages found that full-time workers without a college degree make about $1,800 less per year.

Ending currency manipulation, lifting labor standards and leveling the global economic playing field go hand in hand. The current trade relationship between the U.S. and China does not adequately serve the vast majority of the Chinese and American workers who make and buy the goods being traded.

See EPI’s report for a deeper analysis of the problem.

job loss by industry trade deficit

 

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Gas Tax Formula Needs Change to Protect Investments in Infrastructure

A drop in the price of gasoline means that, come January, Kentuckians will also pay 4.3 cents less per gallon in gas taxes. But while many drivers won’t even notice the tax decrease, the resulting $129 million loss to the state’s Road Fund could jeopardize the safety and efficiency of our transportation system and reduce construction jobs at a time Kentucky desperately needs them.

That’s because the gas tax is Kentucky’s primary source of revenue for the Road Fund, accounting for almost 60 percent of what the state collects to build, maintain and upgrade its roads and bridges. Half of state gas tax revenues are distributed back to local governments through the County Road Aid program (receiving 18.3 percent), the Rural Secondary Aid program (22.2 percent), and the Municipal Road Aid program (7.7 percent).

The estimated $129 million shortfall is 15 percent of the $883 million in gas taxes the state is officially estimated to collect in budget year 2015 and eight percent of the total projected revenue for the Road Fund. As a result, Kentucky’s “rapidly growing backlog” of roads that need resurfacing is likely to grow longer still, with traffic congestion, hazardous road conditions and fewer jobs improving infrastructure as potential consequences.

Asymmetrical protections from price fluctuations put the Road Fund at risk

Kentucky’s gas tax is calculated at nine percent, per gallon, of the average wholesale price of gasoline (AWP). Drivers also pay a “supplemental highway tax” of five cents per gallon and a fee of 1.4 cents per gallon for the cleanup of underground petroleum storage tanks. Every quarter, the Department of Revenue assesses the AWP and adjusts the tax, such that taxes rise and fall with prices. In recent years, Road Fund revenue growth has been strong due to elevated gas prices. However, increased domestic production of crude oil and weak global demand, particularly in Asia and Europe, have made gas prices fall. As a result, Kentucky’s tax will drop from 25.5 to 21.2 cents in January.

In the last five quarters, this will be the fourth such drop. The total revenue decline for the current budget year from decreases—including the one set to go into effect in January—is $147 million. Transportation Cabinet spokesperson Chuck Wolfe explains that the general rule for calculating the impact of these drops is that the state loses $30 million on an annualized basis for each penny that the tax falls.

gas tax rate

Source: Kentucky Transportation Cabinet

The state does provide some protection from fluctuating prices, but those protections are uneven: gas tax increases are capped at 10 percent but decreases are not capped. The floor for the AWP has not been lifted since 2009 when the price of gasoline was $1.786 and the recession had resulted in a steep drop in gas prices. It’s now far too low to protect the Road Fund from the pending 17 percent decline in the gas tax. And when gas prices do rise, the ceiling will limit revenue recovery, likely meaning more cuts to infrastructure projects in the future.

Legislature should fix gas tax formula

Governor Beshear’s 2012 Blue Ribbon Commission on Tax Reform proposed that the state safeguard the Road Fund by raising the floor to what was then the current AWP of $2.616 per gallon. And in his 2014-2016 executive budget, Beshear recommended freezing the AWP at $2.878, which would have raised the gas tax by 1.5 cents to 25.9 cents per gallon—its rate at the end of 2013—and allowed $107 million in Road Fund projects to move forward. The 2014 House-passed revenue bill that accompanied the budget took up that proposal, but the 2014 General Assembly ended with no action to raise the floor and protect against cuts.

To make things worse, the prior General Assembly in 2013 exacerbated Road Fund challenges by passing a bill with a $34 million Road Fund tax cut: as a part of the pension reform package, the legislature provided a trade-in credit against the motor vehicle license tax based on the value of a used car when purchasing a new car.

The money Kentucky has to build and maintain its roads and bridges is also hurt by Congressional inaction on the federal gas tax which has been frozen at 18.4 cents per gallon since 1993. States receive federal Road Fund dollars for infrastructure work, and the Institute on Taxation and Economic Policy estimates that gas tax erosion has cost the nation $215 billion over the last twenty years. To prevent event deeper cuts to infrastructure investments, the federal government has patched its transportation spending with general revenues which could have gone to other needed programs.

Kentucky lawmakers can take action on the state’s Road Fund by fixing the gas tax. To prevent the current pending $129 million loss, they could freeze the AWP floor at its current level of 25.5 cents per gallon (based on the July 2014 AWP survey). And to avert such deep drops in the future, the legislature should provide the same protection from a 10 percent price decrease that is provided for a 10 percent increase.

Rising fuel efficiency means that other changes are necessary for long-term stability

Guaranteeing we have what it takes to build and maintain a safe and efficient transportation system in the long-term will require a broader strategy that reflects inflation in construction costs. Strategies to sustain revenue for infrastructure involve indexing the gas tax to something other than gas prices or looking at other revenue sources entirely.

One way to strengthen the relationship between gas taxes and the rising cost of road construction (including asphalt, machinery, labor and other expenses) is to link the gas tax to a measure of inflation. In Florida, Maryland and Massachusetts, for example, gas taxes grow with the Consumer Price Index.

But even with protections against inflation, as fuel efficiency standards continue to increase and more people buy cars that use less gas including electric and hybrid vehicles, gas consumption and tax revenue will erode. In fact, taxable gallons of gas have declined an average of 1.3 percent per year over the past ten years. In recent years, elevated AWPs have offset this trend and kept revenue growth strong. With lower prices—which analysts forecast will continue at least through 2015–the Road Fund will feel the effect of declining consumption.

One strategy that some states have experimented with—including Oregon, Florida, Illinois, Idaho, Kansas, North Carolina and Texas—is to add a pay-per-mile or ”vehicle-miles-traveled” (VMT) tax to their Road Fund portfolios. The VMT allows drivers to contribute to transportation system costs in proportion to their actual usage, whether their vehicles run on gas, less gas, or alternative fuels. Two caveats: gas taxes are an important avenue through which drivers with less fuel efficient cars help pay for the environmental side-effects of gas consumption. VMT’s should complement rather than replace gas taxes for this reason. Also, like gas taxes, VMT’s must be indexed in some way to rising construction costs if they are to provide a sustainable source of revenue.

Future legislation on the gas tax could also consider its regressive nature, costing low-income residents a higher share of their income than the wealthy. Kentucky could address this problem by providing a refundable credit, tied to inflation, against state income taxes for those below a certain income threshold.

Kentuckians need safe and efficient roads and bridges to travel to work and school, and our businesses need a reliable system for the transport of goods. Problems with Road Fund revenues need addressing or we will continue to experience revenue shortfalls that hurt investments in needed infrastructure.

 

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LTE: Mesa’s Public Subsidies

Published in the Courier-Journal on December 3, 2014

Nowhere in his recent op-ed in opposition to a local minimum wage did Ted Longacre, CEO of Mesa Foods, mention that his company has received substantial public subsidies that the entire community and state are paying for.

According to a state database, in 2012 Mesa Foods was approved for $850,000 in corporate income tax breaks. In 2014 the company received preliminary approval for another $700,000 in subsidies that include allowing the company to keep a portion of its employees’ income taxes. Mesa Foods also received $120,000 in training funds from the local workforce board in 2012.

Mr. Longacre says he pays a starting wage of $8.50 an hour with an opportunity for raises at least twice a year, and the state database says the company pays $16.86 an hour on average for existing employees and $11.80 on average for the new employees they’re planning to add.

Given what the company already pays and how much we are all supporting it with public dollars, the modest wage increase over three years the council is now considering seems reasonable — especially given the boost to the local economy and lives of workers that will result.

Despite Exemptions, Kentucky’s Sales Tax is Still Regressive

Some proponents of a local option sales tax are making the claim that the regressive nature of the sales tax is taken care of in Kentucky because the state exempts groceries and other items like prescription drugs from the tax.

But while the sales tax would be even more regressive if those items were included, exempting them doesn’t change the fact that lower-income people pay a higher share of their income in sales taxes than do the wealthy.

The regressive nature of the sales tax has to do with the fact that poorer people, out of necessity, typically spend all of their income to make ends meet. Higher income people, in contrast, are able to save a portion of their income, meaning that portion is not subject to sales taxes.

The effect of exempting groceries can be seen by comparing Kentucky and South Dakota in a study of the distributional impact of state and local taxes by the Institute on Taxation and Economic Policy. South Dakota has a 4 percent state sales tax and allows local sales taxes of up to 2 percent; the average combined sales tax rate across the state is 5.83 percent, very close to Kentucky’s sales tax of 6 percent. However, South Dakota’s sales tax has a very broad base, including groceries and many services.

As shown in the graph below, including those items makes South Dakota’s tax a higher share of income for those on the bottom of the income scale than Kentucky’s. But who pays the sales tax in each state follows the same distributional pattern of declining as incomes rise, making the tax regressive.

sales tax regressive

Source: Institute on Taxation and Economic Policy

Clearly, a sales tax that includes groceries is more regressive than one that does not. But, as the graph shows, even with the exemptions the poorest 20 percent of Kentuckians pay five times more of their incomes in sales taxes than do the richest one percent of Kentuckians. Any new local sales tax would have the same distribution.

When considering all of the pros and cons of a local option sales tax, it’s important to understand accurately who pays the tax.