Last week Donald Trump pulled out his .44 caliber revolver and told the global trade system to “Go ahead. Make my day.”
Withdraw from the Transpacific Partnership trade agreement. Re-negotiate or pull out of NAFTA. Direct the government to use every tool under American and international law to end trade abuses. Designate China as a currency manipulator. Instruct the U.S. Trade Representative to bring trade cases against China. These are the highlights of Trump’s trade agenda—like the man himself, an agenda that is anything but timid.
Trump promises bold action and dramatic results, making the following three points, among many others:
- “Massive trade deficits subtract directly from our Gross Domestic Product.”
- “We are going to put American-produced steel back into the backbone of our country. This alone will create massive numbers of jobs.”
- “This wave of globalization has wiped out our middle class. It doesn’t have to be this way. We can turn it all around – and we can turn it around fast.”
Trump promises massive numbers of jobs and a fast turnaround, all built on the notion that the trade deficit is the primary impediment to job creation in the US. This raises a critical question—Is Mr. Trump correct? Will this anti-trade agenda actually produce “massive numbers of jobs?”
Let’s be honest. History is littered with economic policy ideas that don’t produce the desired results. Many want to believe Trump is right. But that doesn’t mean he is right. I’m not a Trump-basher. But I do think this is one area for which Trump supporters need to prepare to be disappointed. Trump might be right that we should change a few things in our trade relationships. But Trump’s aggressive trade agenda will not produce the results he is claiming. Consider the following points.
Are trade deficits really job killers?
Japan and Germany generally have either trade surpluses or much smaller trade deficits than the US. Both of those countries have experienced lower growth than the US over the last three decades. Both of those countries have also experienced declines in manufacturing jobs. If trade deficits and surpluses were that important to economic growth, wouldn’t countries like Germany and Japan be killing the US in terms of growth? Remember, Trump is saying trade deficits have a huge, direct and negative impact on growth. He isn’t just saying a trade deficit is a contributing factor. Trump says it is THE factor. Since Germany and Japan are “winning” in trade, by Trump’s definition, shouldn’t they be outperforming the US by a long shot?
Is China really manipulating its currency to support exports?
China’s currency rose in value roughly 30% from 2006-2013. Over that same time, China liberalized its currency trading and capital markets somewhat, allowing for market forces to play a greater role in China’s currency and capital flows. China’s currency has declined around 10% from its all-time high in 2013. But, it has actually been the market that has driven China’s currency lower as investors react to slower growth in China. China’s government has been supporting its currency, in part because it wants to minimize capital outflows. The fact is that, at this point in time, if China stopped intervening in it currency markets, its currency would fall further, not rise. Trump has this backwards.
US-China Trade: A result of natural economic conditions or deliberate manipulation?
In addition to a rising currency, China has also experienced nearly double-digit annual wage growth over the last five or six years. Because of its rising currency and wages, China is no longer the lowest-cost producer for many low-end products like shoes, apparel, and toys. China has actually endured massive plant closures and layoffs in these sectors as it loses market share globally. That market share and those jobs haven’t returned to the US. Instead they moved to countries like Vietnam and India. Meanwhile, China has actually gained market share relative to higher value added products like appliances and computers. If China is that good at manipulating its economy to support exports, why would China be willing to endure plant closings, layoffs, and declines in market share? Couldn’t China just pull a few strings and make itself more competitive?
China was a poor country that used to sell only cheap items but, as it develops, China is increasingly selling more sophisticated items. In the past, China couldn’t afford to buy from the US. But, as it develops, China is buying more and more from abroad (which is why US exports to China have quadrupled over the last decade). Isn’t it possible that trade patterns with China are a natural result of China’s development and not some massive, unfair, market-manipulation program?
Are US companies and the government really negligent on trade?
The US recently slapped a 500+% tariff against a particular type of steel from China, evidence that the US has a fairly robust system for penalizing unfair trade practices. Companies and industries are free to file complaints at any time and often win relief. Yet these type of judgments have never amounted to more than 3% of our total trade with China. Usually such measures are applied to less than 1% of our trade. Trump’s rhetoric seems to indicate that, once he is in office, that number will skyrocket. Is it really possible that US trade officials are that negligent, incompetent, or unwilling to protect America’s interests? Are US companies so timid that they refuse to file complaints and protect their own market? Isn’t it possible that the reason a relatively small portion of imports is labeled “unfair” is because, for the most part, our trade is based on free market principles and not unfair practices overseas?
If Trump were promising more modest results from a more restrictive approach to trade, this would be a closer debate. But that’s not Trump’s style. He is promising the world based on his trade agenda. If he wins it will be fascinating to see what becomes of his trade agenda–great politics and interesting economics. For all those expecting big things, I wouldn’t start betting on massive job growth just yet.