As President Trump talks more openly about aggressive action
on the trade front to support the US economy, traditional economists and
commentators, especially many on Wall Street, are raising the volume on a scare
campaign, aimed at suggesting all sorts of imaginary negative consequences. They
fail to recognize that persistent global trade imbalances, whereby trade
surplus countries overproduce and excessively rely upon deficit countries’
consumers for growth, pose the most serious risk to global growth and economic
stability.
In recent days, President Trump has spoken openly about
terminating NAFTA, the free trade agreement with Canada and Mexico. And
separate reports have emerged in Axios and the
Financial
Times that he wants to impose tariffs on Chinese imports into the US.
Both policies can make good sense if applied carefully and
in a well-targeted fashion. (We know from private discussions that many
Democrats would support these policies, privately if not publicly.) NAFTA has
cost the US about a million jobs in the 23 years since it came into force,
mainly in manufacturing jobs that have moved to Mexico. It’s also helped to
drive down real wages, especially in the automotive industry. If the US
withdrew from NAFTA, it would make sense to levy tariffs in the range of 10% to
25% on Mexican manufactured imports. It’s likely that businesses would react by
immediately halting investment in Mexican production facilities and looking
into bringing production back to the US. For example, BMW is spending $1
billion on a Mexican plant likely to employ 1,500 workers when it opens next
year. That plant’s production is primarily for the US market: in the first half
of this year, BMW sold 171,291 cars in the US, 16 times as many as the 10,737
it sold in Mexico. Tariffs applied to
the sectors where we have lost the most jobs to Mexico, such as motor vehicles,
electronics, machinery, and furniture, could lead to a significant boost to
investment, production and jobs in domestic US manufacturing industry.
With China the numbers are even larger. China accounted for nearly
half of the US trade deficit last year, $347 billion out of a total of $750
billion. According to an estimate
by Rob Scott of the Economic Policy Institute, Chinese imports cost the US 3.4
million lost jobs between 2001 and 2015.
If the Trump Administration levied a tariff of say 25% on foreign
steel due to subsidized overcapacity, this would lead immediately to a rise in
US steel prices. If the Administration made it clear it was committed to the
new policy, it would give steelmakers the confidence to invest for the future,
and we would see increased production and hiring in steel. Any steel tariff would be better if it
included downstream products with substantial steel content to prevent subsidized foreign steel from
avoiding the tariff simply by exporting valued added products.
The expansion in the domestic economy would outweigh the
effects of the price increases in the steel supply chain—leading to faster
growth in real gross domestic product (GDP), exactly the goal Trump and the
Republicans are seeking. This policy would also put pressure on the Chinese
government, making it clear that for the first time the US was determined to
act instead of just talk about the problem of China’s strategy of dominating
the world steel market through billions of dollars of government subsidies.
Traditionalists have raised the spectre
of a “global recession” and “trade war” they claim could follow remedial trade
action by the US government. They are wrong for three reasons.
First, World Trade Organization rules prevent other
countries from raising tariffs unless they file and win a WTO case that
declares the US action unlawful. That process takes years. If the US were to
lose, no retaliatory tariffs would be imposed if the US simply dropped the
tariffs.
Second, other countries are far more dependent upon exports
to the US than we are dependent upon exports to them. We need to realize that
we have the market power. Other countries have far more to lose should they
choose to escalate any trade dispute.
Third, most of these
“global recession” forecasts are based on economic models that specifically exclude the expansionary effects of a
tariff on a domestic US industry. In some cases, that’s because the free trade biases
of the economists who built the models are built into the underlying
assumptions of the model. In other cases, it’s simply because the models are
old—they don’t have enough depth to handle trade effects. In effect, they are
obsolete for today’s world.
A New Trade World
In fact, the world-view of many of these pundits is
obsolete. They worry irrationally about the end of what they call the “liberal
global economic world order that has supported prosperity since 1948”. (the
phrase comes from noted Dutch economist Willem Buiter) What Mr. Buiter and his
colleagues fail to recognize is that this world order was ended by a series of
events including: the end of Communism, which brought millions more low-wage
workers into the global workforce; the aggressive implementation by China of
growth led by state-supported exports; and globalization itself, which
intensified competition and depressed living standards for all the relatively
high-wage workers in developed nations like the US.
We are in a new world. The US is still the world’s largest
economy (although China is not far behind). It’s up to us to take a long-term,
truly global view, and develop a strategy by which deficit nations can address
their deficits, attack inequality by boosting the incomes of the working and
middle classes, and establish a world order where surplus nations can no longer
use beggar-my-neighbor policies to export unemployment to deficit nations.
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