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 (Exhibit 1). 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."¹ 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...